AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:

+ 0cInc nd cxpln sIrIcgc Inncl mngcmcnI,

+ SIIc Ihc Iw0 br0d cIcg0rcs 0I sIrIcgc Inncl dccs0ns IhI rc n0rmlly mdc
by Inncl mngcrs 0I n 0rgnsI0n,
+ McnI0n s0mc 0I Ihc lIcrnIvc c0urscs 0I cI0n (sIrIcgcs) IhI rc vlblc I0 Ihc
c0mpny nd cpblc 0I chcvng Ihc 0rgnsI0n's Inncl 0b|ccIvcs,
+ SIIc s0mc 0Ihcr spccIs 0I Ihc 0vcrll sIrIcgc pln n whch Inncl mngcrs
rc nv0lvcd, nd
+ LsI Ihc sIcps nv0lvcd n sIrIcgc Inncl dccs0nmkng.
SIrIcgc Inncl mngcmcnI cn bc dcscrbcd s Ihc ll0cI0n 0I scrcc
rcs0urccs I0 dcnIIcd p0ssblc sIrIcgcs m0ng c0mpcIng 0pp0rIunIcs
nd Ikng ncccssry cI0ns I0 m0nI0r Ihc pr0grcss 0I Ihc ch0scn 0pp0rIunIy
s0 s I0 chcvc scI 0b|ccIvcs.
H0wcvcr, Ihc ChrIcrcd !nsIIuIc 0I MngcmcnI Acc0unInIs 0I UK (C!MA)
dcIncs SIrIcgc Fnncl MngcmcnI s Ihc dcnIIcI0n 0I Ihc p0ssblc
sIrIcgcs cpblc 0I mxmsng n 0rgnsI0n's ncI prcscnI vluc, Ihc
ll0cI0n 0I scrcc cpIl rcs0urccs bcIwccn c0mpcIng 0pp0rIunIcs nd
Ihc mplcmcnII0n nd m0nI0rng 0I Ihc ch0scn sIrIcgy s0 s I0 chcvc
sIIcd 0b|ccIvcs.
!n 0rdcr I0 undcrsInd whI SIrIcgc Fnncl MngcmcnI s b0uI, I s
ncccssry I0 kn0w Ihc mcnng 0I Ihc Iw0 w0rds 'sIrIcgy' nd 'sIrIcgc' s
pr0vdcd by 0xI0rd Advnccd Lcrncr's 0cI0nry, b
Ih
cdI0n.
Ths s Ihc pr0ccss 0I plnnng s0mcIhng 0r crryng 0uI pln n
skllIul wy.
2
Ths s d0nc s prI 0I pln IhI s mcnI I0 chcvc prIculr
purp0sc.
!I Ihc b0vc dcInI0ns rc uscd s gudc, Ihcn sIrIcgc Inncl
mngcmcnI cn bc dcIncd, s Ih0sc spccIs 0I Ihc 0vcrll sIrIcgc pln
0I n 0rgnsI0n IhI c0nccrn Ihc Inncl mngcrs. F0r cxmplc, Ihcrc
rc mny spccIs 0I busncss pln (I0 bc dscusscd lIcr undcr C0rp0rIc
SIrIcgy): mrkcIng nd slcs pln, pr0ducI0n pln, pcrs0nncl pln, cpIl
cxpcndIurc pln, cIc. All Ihcsc plns hvc Irrcchng Inncl mplcI0ns
I0r Ihc Inncl mngcrs 0I n 0rgnsI0n s Ihcy wll bc cxprcsscd n
Inncl Icrms I0r Ihc purp0sc 0I cvluIng Ihc 0vcrll pcrI0rmncc 0I Ihc
0rgnsI0n, whch, IsclI, s mcsurcd n Inncl Icrms.
Thcrc rc Iw0 br0d cIcg0rcs 0I sIrIcgc dccs0ns IhI rc n0rmlly mdc
by Inncl mngcrs 0I n 0rgnsI0n:
()
Thc m0sI ppr0prIc lcvcl nd mx 0I Ihc sscIs.
(b)
Thc 0pImum lcvcl nd mx 0I Iundng rcqurcmcnIs I0r
Ihc sscIs.
Thc b0vc mn dccs0ns wll I0cus 0n pr0vdng nswcrs I0 Ihc
I0ll0wng qucsI0ns:
() Sh0uld ncw IcI0ry bc bulI I0r Ihc purp0sc 0I pr0ducng (nd
scllng) ncw pr0ducI 0r sh0uld c0mpny lrcdy nv0lvcd
n Ihc pr0ducI0n 0I such pr0ducI bc cqurcd!
() Sh0uld n 0rgnsI0n mkc prIculr c0mp0ncnI nh0usc
0r sh0uld I buy I Ir0m 0uIsdc!
() !n Inncng Ihc nvcsImcnIs, sh0uld Ihc c0mpny rcly s0lcly
0n Iunds Ir0m 0wncrs 0r sh0uld I mx Ihcsc Iunds wIh Ih0sc
Ir0m lcndcrs!
(v) !I mx 0I Iunds s Ihc 0pI0n Ikcn, whI pr0p0rI0n 0I cch
s0urcc sh0uld bc uscd!
(v) H0w sh0uld Ihc Iunds bc mdc vlblc nd I whI c0sI!
(v) Sh0uld dvdcnds bc pd n0w 0r sh0uld crnngs bc rcnvcsIcd
nd dvdcnds pd lIcr!
3
(v) !I Ihc 0rgnsI0n dccdcs I0 py dvdcnd, whI pr0p0rI0n 0I
Ihc vlblc crnngs sh0uld bc pd nd whI pr0p0rI0n
sh0uld bc rcIncd I0r IuIurc cxpns0n nd gr0wIh!
(v) Sh0uld Ihc 0rgnsI0n bc pyng Ixcd Nr m0unI 0r
Ixcd pcrccnIgc 0I crnngs cvcry ycr!
(x) whI sh0uld bc Ihc ppr0prIc lcvcl 0I sI0cks I0 h0ld I ny
p0nI n Imc!
(x) Sh0uld Ihc c0mpny cxIcnd crcdI I0 cusI0mcrs nd h0w much
sh0uld bc gvcn I0 cch cusI0mcr!
(x) Sh0uld Ihc c0mpny Ikc dvnIgc 0I csh dsc0unI I 0IIcrcd
by supplcrs!
(x) whch Iypc 0I bnks' IclIy rrngcmcnI sh0uld bc puI n plcc
- Icrm l0n, 0vcrdrII 0r b0Ih!
Thc prcIx sIrIcgc, I0 Inncl mngcmcnI, mcns IhI dccs0ns I0
cccpI 0r rc|ccI pr0p0sls hvc I0 bc bscd 0n sIrIcgc IcI0rs. CpIl
nvcsImcnI dccs0ns rc Iypcl cxmplcs 0I Ihcsc dccs0ns. An nvcsImcnI
pr0p0sl my dd vluc I0 Ihc busncss bscd 0n Ihc pplcI0n 0I Ihc
dsc0unIcd csh Il0w Icchnqucs whch Ikcs nI0 cc0unI 0nly Ihc qunIIblc
csh Il0ws. H0wcvcr, Ihc dccs0n mghI bc I0 rc|ccI Ihc pr0p0sl I s0mc
hghly unccrIn buI vcry bcncIcl npuIs rc n0I c0nsdcrcd. 0n Ihc 0Ihcr
hnd, pr0p0sl mghI bc cccpIcd 0n sIrIcgc bscs cvcn I, bscd 0n
qunIIblc csh Il0ws l0nc, I subIrcIs vluc Ir0m Ihc busncss.
Thc 0Ihcr rclIcd cIvIcs n whch Fnncl Mngcrs rc nv0lvcd ncludc
Ihc I0ll0wng:
() Fnncl mngcrs w0rk wIh 0Ihcr mngcrs wIhn Ihc 0rgnsI0n
n Ihc prcprI0n 0I Ihc vr0us plns wIh vcw I0 pr0ducng Ihc
pr0|ccIcd Inncl sIIcmcnIs 0I Ihc 0rgnsI0n.
(b) Fnncl mngcrs mIch cch spccI 0I Ihc busncss pln wIh Ihc
Inncl rcs0urccs vlblc nd cnsurc IhI cch pln, n Inncl
Icrms, Ills wIhn Ihc I0Il Iunds vlblc. A pr0ducI0n pln, I0r
4
nsIncc, musI n0I 0nly bc n grccmcnI wIh Ihc 0vcrll sIrIcgc
pln buI musI ls0 bc Innclly Icsblc.
(c) Fnncl mngcrs, l0ng wIh 0Ihcr mngcrs, rc nv0lvcd n
m0nI0rng nd c0nIr0llng Ihc cIvIcs 0I Ihc 0rgnsI0n. AcIul
rcs0urccs uscd rc c0mprcd wIh plnncd rcs0urccs, dcvI0ns rc
hghlghIcd nd ppr0prIc c0rrccIvc cI0n s Ikcn n cch csc.
(d) Fnncl mngcrs w0rk hndnhnd wIh cpIl mrkcI 0pcrI0rs,
prIculrly Ihc ssung h0uscs nd Ihc sI0ckbr0kcrs. Thcy rc
c0nccrncd wIh Ihc cIIccI 0I Ihcr dccs0ns 0n Ihc shrc prcc. F0r
cxmplc Ihcy d0 n0I hvc I0 w0rry b0uI IhrcIs 0I Ikc0vcr I Ihcr
0rgnsI0n's shrc prcc s ncrcsng.
(c) Fnncl mngcrs c0nccrn Ihcmsclvcs wIh Ihc cvcnIs n Ihc lcgl,
p0lIcl nd s0c0cc0n0mc cnvr0nmcnI, sncc I my IIccI Ihc
0rgnsI0n's csh Il0w. An cxmplc s Ihc cncImcnI 0I Ihc lw 0n
cnvr0nmcnIl p0lluI0n by Ihc NI0nl Asscmbly.
All Ihc b0vc qucsI0ns nd Ihc rclIcd cIvIcs wll bc IrcIcd n
dcIl n subscqucnI chpIcrs.
() 0cIcrmnc Ihc 0b|ccIvcs 0I Ihc 0rgnsI0n.
(b) !dcnIIy ll p0ssblc c0urscs 0I cI0n.
(c) C0llccI, c0llIc nd rcc0rd dI n rcspccI 0I cch lIcrnIvc c0ursc
0I cI0n.
(d) Anlysc, summrsc nd prcscnI dI n I0rm suIblc I0r dccs0n
mkng.
(c) Arrvc I dccs0n, Ikng nI0 cc0unI qunIIIvc, n0nqunIIIvc,
s0cl, culIurl, n0rmIvc, psych0l0gcl IcI0rs cIc.
(I) ExccuIc Ihc dccs0n, Ihr0ugh prgmIc nd c00rdnIcd cI0n, I0
cIulsc Ihc pln.
(g) HghlghI Ihc dIIcrcnccs bcIwccn plnncd rcsulIs nd cIul rcsulIs.
(h) Tkc ncccssry c0rrccIvc cI0n IhI wll mpr0vc pcrI0rmncc 0r lcd
I0 Ihc d|usImcnI 0I Ihc 0rgnl pln.
SIrIcgc Fnncl MngcmcnI s plnnng nd c0nIr0l pr0ccss wIh I0cus
0n ll0cI0n 0I Inncl rcs0urccs (Iunds) n such wy s I0 chcvc Ihc
5
spccIcd 0b|ccIvcs 0I 0rgnsI0ns. Thc mcIh0ds 0I Inncl nlyss uscd
by Inncl mngcrs hvc n0w bccn cxIcndcd I0 ncludc c0nsdcrI0n 0I
sIrIcgc IcI0rs - Ih0sc hghly unccrIn nd unqunIIblc IcI0rs whch
my brng subsInIl bcncIIs I0 Ihc 0rgnsI0n buI rc gn0rcd by Ihc
c0nvcnI0nl dsc0unIcd csh Il0w (0CF) pprsl mcIh0ds.
Thc Iw0 m|0r cIvIcs n whch Inncl mngcrs rc prmrly nv0lvcd
rc nvcsImcnIs n sscIs 0I Ihc 0rgnsI0n nd Ihc Inncng 0I Ih0sc sscIs.
Thcrc rc 0I c0ursc, mny mngcmcnI dccs0ns whch Ill wIhn Ihcsc
Iw0 br0d cIcg0rcs. Thcrc rc ls0 0Ihcr cIvIcs 0I n 0rgnsI0n n
whch Inncl mngcrs rc nv0lvcd. Thcsc rc, m0ng 0Ihcrs, Ihc c0
0rdnIng cIvIcs IhI I0sIcr g0l c0ngrucncc, sI0ck mrkcI cIvIcs nd
cxIcrnl cnvr0nmcnIl cIvIcs, prIculrly Ih0sc cxIcrnl lmII0ns
whch Inncl mngcrs sh0uld rcc0gnsc whcn Ihcy Ikc dccs0ns.
Fnncl mngcrs musI pprccIc h0w crIcl ccrIn sIcps rc, n Ihc
dccs0nmkng pr0ccss. F0r cxmplc, 0b|ccIvcs musI bc clcrly dcIncd
bcI0rc cmbrkng 0n dcnIIcI0n 0I sIrIcgcs. Thcrc s ls0 Ihc nccd I0r
Iccdbck I0 cnblc c0rrccIvc cI0n I0 bc Ikcn.
.7.
. SIrIcgy s c0nccrncd wIh ________________________
A F0rccsIng
!mplcmcnII0n
C Fccdbck
0 M0nI0rng
E Plnnng
2. SIrIcgc dccs0ns mply IhI dccs0ns rc bscd 0n_______________
A unIIIvc IcI0rs.
ulIIvc IcI0rs.
C Sh0rI Icrm.
0 unIIIvc nd qulIIvc IcI0rs sh0rI nd l0ng Icrm.
E L0ng Icrm.
3. 0ccs0ns 0n w0rkng cpIl mngcmcnI rc c0nccrncd wIh
A Pr0IIblIy
0r0wIh
C Pr0IIblIy nd lqudIy
0 LqudIy
E L0ng Icrm sIblIy
b
4. Thc IrsI sIcp n Ihc sIrIcgc Inncl dccs0n mkng pr0ccss s
A C0llccIng, C0llIng nd rcc0rdng dI
!dcnIIyng ll p0ssblc c0urscs 0I cI0n
C Anlysng, summrsng nd prcscnIng dI
0 0cIcrmnng Ihc 0b|ccIvcs 0I Ihc 0rgnsI0n
E Arrvng I dccs0n
5. Thc Iw0 br0d phscs 0I dccs0n mkng rc
A M0nI0rng nd c0nIr0l
C0nIr0l nd Iccd bck
C Plnnng nd m0nI0rng
0 Plnnng nd mplcmcnII0n
E M0nI0rng nd Iccdbck
.7.2
. SIIc Iw0 br0d cIcg0rcs 0I sIrIcgc dccs0ns wIh whch Inncl
mngcrs rc c0nccrncd.
2. SIIc Ihc kcy dccs0n whch Inncl mngcrs mkc wIh rcspccI I0
dvdcnds.
3. why s cpIl nvcsImcnI dccs0n Ihc m0sI mp0rInI dccs0n 0I ll Ihc
dccs0ns mdc by Inncl mngcrs!
4. whcn mngcrs mkc dccs0ns, whI sh0uld bc Ihc c0mm0n bss 0I
Ihcr dccs0ns!
5. SIIc 0NE cIvIy 0I busncss 0rgnsI0n n rcspccI 0I whch Ihc
Inncl mngcr s scc0ndrly nv0lvcd.
7
AIIcr sIudyng Ihs chpIcr rcdcrs, sh0uld bc blc I0:
+ Expln Ihc 0b|ccIvcs 0I n 0rgnsI0n,
+ !dcnIIy s0mc 0I Ihc vr0us Inncl 0b|ccIvcs 0I busncss 0rgnsI0n,
+ rng 0uI Ihc 0vcrll Inncl 0b|ccIvc whch Inncl mngcrs sh0uld ssumc,
+ SIIc nd brcIly cxpln Ihc n0nInncl 0b|ccIvcs 0I busncss 0rgnsI0n,
+ SIIc nd brcIly cxpln Ihc s0cl nd cIhcl 0blgI0ns 0I busncss 0rgnsI0n,
+ Expln Ihc c0nccpI 0I vlucI0rm0ncy s n 0b|ccIvc 0I mngcrs n publc sccI0r
0rgnsI0ns, nd
+ SIIc Ihc c0mp0ncnIs 0I vlucI0rm0ncy nd Ihc pr0blcms n usng Ihs ppr0ch.
Thc 0b|ccIvc 0I n 0rgnsI0n s Ihc cnd whch Ihc 0rgnsI0n nIcnds I0
chcvc nd whch nvcsImcnI nd Inncng dccs0ns cnc0urgc I I0
chcvc. Thc dccs0ns dcnIIcd n rc IhcrcI0rc n0rmlly
mdc wIh rcspccI I0 Ihc 0b|ccIvc 0r g0l 0I Ihc 0rgnsI0n. Thc mplcI0n
0I Ihs s IhI cvcry Inncl dccs0n wll bc d|usIcd 0n Ihc bss 0I Ihs
0b|ccIvc.
!I dccs0ns wcrc n0I mIchcd wIh 0b|ccIvcs, Ihcrc w0uld bc:
() bscncc 0I rclcvnI nI0rmI0n wIh whch Ihc dccs0n mkcr wll
w0rk, nd
(b) n0 bscs I0r Inncl mngcrs' dccs0ns.
Thcsc my rcsulI n dccs0ns bcng Ikcn IhI my n0I bc c0ngrucnI wIh
Ihc 0rgnsI0n's 0b|ccIvcs.
8
Thcrc rc mny 0b|ccIvcs whch n 0rgnsI0n cn pursuc. !I s gcncrlly
cccpIcd IhI Ihcrc sh0uld bc 0nc 0vcrll 0b|ccIvc wIh ll 0Ihcr 0b|ccIvcs
gvng supp0rI s0 IhI Ihs 0vcrll 0b|ccIvc cn bc chcvcd. whI s, h0wcvcr
unccrIn s Ihc 0b|ccIvc IhI sh0uld scrvc s Ihc rcl 0b|ccIvc 0I Ihc
0rgnsI0n. F0r busncss 0rgnsI0n, Inncl 0b|ccIvc s gcncrlly
Ikcn s Ihc 0vcrll 0b|ccIvc.
Thc Inncl 0b|ccIvcs 0I busncss 0rgnsI0n ncludc, m0ng
0Ihcrs, Ihc I0ll0wng:
() Pr0II mxmsI0n,
(b) Pr0IIblIy mxmsI0n,
(c) LqudIy,
(d) L0ngIcrm sIblIy,
(c) 0r0wIh,
(I) C0rp0rIc wclIh mxmsI0n, nd
(g) Shrch0ldcrs' wclIh mxmsI0n.
Thcsc Inncl 0b|ccIvcs rc IurIhcr dscusscd s I0ll0ws:
()
Ths 0b|ccIvc rcIcrs I0 cc0unIng pr0IIs nd I mcns IhI
Inncl mngcrs sh0uld IIcmpI I0 mkc s much pr0IIs
s p0ssblc.
Fnncl mngcrs Icnd I0 pursuc Ihs 0b|ccIvc bccusc 0I
Ihc IcI IhI Ihc 0rdnry shrch0ldcrs rc, n lw, Ihc 0wncrs
0I Ihc 0rgnsI0n. Thcy hvc ulImIc c0nIr0l 0I Ihc c0mpny
nd Ikc rcsdul pr0IIs.
H0wcvcr, pr0II mxmsI0n s g00d 0b|ccIvc buI I hs Is
dcIccnccs.
() A c0mpny, I0r Ihc purp0sc 0I cxpndng Is 0pcrI0ns,
my rsc ddI0nl cpIl buI Ihc ddI0nl pr0IIs
gcncrIcd my n0I |usIIy Ihc ddI0nl cpIl
9
0bIncd. !n Ihs csc, pr0IIs my bc rsng buI crnngs
pcr shrc my bc Illng.
() A c0mpny my bc crnng sh0rIIcrm pr0IIs I Ihc
cxpcnsc 0I l0ngIcrm pr0IIblIy. F0r cxmplc,
mngcmcnI my bc IcmpIcd I0 cuI d0wn sy rcscrch
nd dcvcl0pmcnI cxpcndIurc n prIculr ycr. Ths
my ncrcsc Ihc pr0IIs 0I IhI ycr buI |c0prdzc IuIurc
slcs nd pr0IIblIy.
() Pr0II mxmsI0n, s n 0b|ccIvc, gn0rcs rsk. Rsk,
prIculrly busncss rsk, s n unv0dblc IcI 0I
busncss lIc s busncss 0rgnsI0ns 0pcrIc nI0 Ihc
IuIurc.
(b)
Ths s bcIIcr 0b|ccIvc Ihn pr0II mxmsI0n s I Ikcs
nI0 cc0unI b0Ih pr0IIs nd Ihc sscIs uIlscd n gcncrIng
such pr0IIs. Mcsurcs 0I pr0IIblIy ncludc RcIurn 0n CpIl
Empl0ycd (R0CE), 0r RcIurn 0n !nvcsImcnI (R0!), RcIurn 0n
EquIy (R0E) nd Ernngs Pcr Shrc (EPS) nd s0 0n. Ths
0b|ccIvc ls0 hs s0mc sh0rIc0mngs, nmcly:
() Pr0blcm 0I dcInI0ns, IhI s, whch pr0IIs nd cpIl
rc I0 bc uscd,
() Thc unccrInIy IhI g0cs wIh Ihc crnng 0I Ihc pr0IIs
(rsk) s gn0rcd,
() Tmc vluc 0I m0ncy s ls0 gn0rcd, nd
(v) !I Ils I0 pr0vdc n 0pcrI0nl Icsblc mcsurc I0r
rnkng lIcrnIvc c0urscs 0I cI0n n Icrms 0I Ihcr
cc0n0mc cIIccncy.
(c)
Ths s purcly sh0rIIcrm 0b|ccIvc whch sh0uld bc pursucd
0nly n pcr0d 0I Icmp0rry cc0n0mc mclId0wn. 0urng Ihs
pcr0d, I s Ihc survvl nsIncI IhI s crIcl. Shrch0ldcrs
rc n0I lkcly I0 puI Ihcr Iunds n c0mpny wh0sc
mngcmcnI lcks Ihc rcqurcd ggrcssvcncss I0r l0ngIcrm
pr0IIblIy nd gr0wIh.
0
Hcrc, Ihc c0mpny d0cs n0I wnI I0 gr0w buI I0 mnIn Is
prcscnI szc 0vcr rclIvcly l0ng pcr0d 0I Imc. Ths s n0I
g00d cn0ugh s I sh0ws lck 0I ggrcssvcncss 0n Ihc prI 0I
Ihc mngcrs.
Ths mplcs gr0wIh n pr0IIs nd sscIs. Ths s g00d
0b|ccIvc s I sh0ws IhI sh0rIIcrm pr0IIs wll n0I bc pursucd
I Ihc cxpcnsc 0I l0ngIcrm Inncl sIblIy. H0wcvcr, Ihs
0b|ccIvc s dcIccnI n s0mc wy sncc gr0wIh cn bc chcvcd
by mcrcly rsng Iunds n Ihc cpIl mrkcIs.
Ths s n lIcrnIvc 0b|ccIvc I0 shrch0ldcrs wclIh
mxmsI0n. Thc cmphss s 0n sIkch0ldcrs.
All nIcrcsI gr0ups n busncss 0rgnsI0n s gnsI 0nc
nIcrcsI gr0up (Ihc shrch0ldcrs) rc c0nsdcrcd. Thc ndvdul
gr0up's nIcrcsIs rc IrcIcd I pr s gnsI mxmsng Ihc
shrch0ldcrs' nIcrcsIs l0nc. Typcl sIkch0ldcrs, sdc Ir0m
0rdnry shrch0ldcrs, rc mngcmcnI, cmpl0yccs,
cusI0mcrs, supplcrs, bnk nd l0n crcdI0rs, l0cl c0mmunIy
nd Ihc g0vcrnmcnI.
Thc nIcnI0n 0I Ihs 0b|ccIvc s I0 mxmsc l0ngrun crnngs
nd I0 rcIn cn0ugh I0 ncrcsc Ihc c0rp0rIc wclIh I0r Ihc
bcncII 0I ll sIkch0ldcrs.
Ths 0b|ccIvc sccks I0 mxmsc rcIurn I0 0rdnry
shrch0ldcrs, s mcsurcd by Ihc sum 0I dvdcnds nd cpIl
pprccI0n. wclIh mxmsI0n ls0 mplcs mxmsng
Ihc vluc 0I Ihc c0mpny 0r Is shrc prcc. Thc shrc prcc s
Ihc rcsulI 0I gcncrl c0nscnsus m0ng mrkcI 0pcrI0rs
rcgrdng Ihc vluc 0I c0mpncs nd mrr0rs Is cxpccII0ns
c0nccrnng Ihc currcnI nd nIcpIcd IuIurc pr0IIs 0I Ihc Irm,
rcIlccIs Ihc Imc vluc 0I m0ncy I0 Ihcm nd Ihc rsk IIchcd
I0 Ih0sc pr0IIs.

wclIh mxmsI0n Ikcs nI0 cc0unI b0Ih rsk nd rcIurn. Sh0rIIcrm nd

l0ngIcrm bcncIIs rc ls0 gvcn cqul pr0mncncc.
Fnncl mngcrs sh0uld ssumc nd I0ll0w Ihs 0b|ccIvc n Ihcr Inncl
dccs0nmkng. Thcy sh0uld, h0wcvcr, blncc I wIh Ih0sc 0I 0Ihcr
sIkch0ldcrs n Ihc Irms.
F0r Ihc purp0sc 0I Ihs sIudy pck, shrch0ldcrs' wclIh mxmsI0n wll
bc d0pIcd n vcw 0I Is supcr0rIy 0vcr Ihc 0Ihcr 0b|ccIvcs nd Ihc IcI
IhI I s Ihc0rcIclly l0gcl nd 0pcrI0nlly Icsblc n0rmIvc g0l I0r
gudng Inncl dccs0nmkng.
Thc I0ll0wng rc s0mc 0I Ihc 0pcrI0nl 0b|ccIvcs 0I busncss
0rgnsI0n whch rc csscnIl I0r Ihc chcvcmcnI 0I Is 0vcrll
sIrIcgc 0b|ccIvc:
() MrkcI Shrc C0nIr0l lrgcr p0rI0n 0I Ihc mrkcI
(b) Slcs 0r0wIh 0bIn spccIcd pcrccnIgc 0I gr0wIh
n slcs v0lumc I prcdcIcrmncd
prcc lcvcl.
(c) MrkcI 0cvcl0pmcnI Scll cxsIng pr0ducIs n ncw mrkcIs.
(d) Tcchn0l0gcl Acqurc Ihc sIIc0IIhcrI Icchn0l0gy
!mpr0vcmcnIs n mnuIcIurng cqupmcnI.
(c) 0rgnsI0n CrcIc sIrucIurc IhI cnc0urgcs
ppr0prIc dclcgI0n 0I uIh0rIy,
dcquIc m0IvI0n nd g00d
prIcpI0n.
(I) S0cl nd cIhcl MccI Ihc s0cl cxpccII0ns 0I Ihc
Rcsp0nsblIy s0ccIy nd Ihc cnvr0nmcnI n whch I
0pcrIcs.
A c0mpny s n nIcgrl prI 0I Ihc s0ccIy nd cnn0I bc scprIcd
Ir0m Ihc cnvr0nmcnI (nIcrnl nd cxIcrnl) n whch I 0pcrIcs. !I,
IhcrcI0rc, 0wcs sIkch0ldcrs b0Ih wIhn nd 0uIsdc Ihc c0mpny
ccrIn s0cl nd cIhcl 0blgI0ns, m0ng whch rc:
2
() : pr0vdc c0nducvc w0rk cnvr0nmcnI, |0b
sIsIcI0n nd |0b sccurIy.
(b) pr0ducc g00d qulIy pr0ducI(s) I
II0rdblc prcc(s) nd dcv0d 0I ny hclIh
hzrds.
(c) py s nd whcn duc nd v0d cxpl0II0n.
(d)
pr0IccI Ihc cnvr0nmcnI Ir0m p0lluI0n 0I Ihc
r 0r wIcr Ihr0ugh ndusIrl wsIgc nd
0l spllgcs. 0vc Inncl ds I0 chrIcs
nd supp0rI sp0rIs dcvcl0pmcnI
pr0grmmcs. ScI up sch00ls nd c0llcgcs I0
cnhncc cducI0nl 0pp0rIunIcs 0I Ihc
chldrcn n Ihc c0mmunIy. 0cI nv0lvcd n
0Ihcr c0mmunIy cIvIcs.
(c) c00pcrIc wIh g0vcrnmcnI by pyng Is
Ix whcn duc nd dsc0urgc Ix cvs0n.
0bcy ll lws cncIcd by Ihc NI0nl
Asscmbly whch IIccI Is 0pcrI0ns I0r
cxmplc hclIh nd sIcIy 0I Is w0rkcrs,
buldng c0nsIrucI0n nd s0 0n. 0sc0urgc
mp0rIs nd v0d smugglng.
Thcsc rc 0rgnsI0ns whch, cc0rdng I0 Aln wlIcr SIcss, rc c0nccrncd
wIh ll0cI0n 0I scrcc nI0nl, sIIc 0r l0cl g0vcrnmcnI rcs0urccs - lnd,
cpIl nd pcrs0nncl - whch hvc lIcrnIvc uscs, I0 chcvc Ihc bcsI, Ihc
mxmum 0r Ihc m0sI s0clly cIIccIvc pr0ducI0n 0I g00ds nd scrvccs.
Thc ccnIrl Ihcmc s cc0n0mc cIIccncy.
!n Ngcr, n0II0rpr0II 0rgnsI0ns rc Ihc vr0us g0vcrnmcnI mnsIrcs
I Fcdcrl, SIIc nd L0cl 00vcrnmcnI lcvcls, Ihc g0vcrnmcnI prsIIls
lkc P0wcr H0ldng C0mpny 0I Ngcr (PHCN), Fcdcrl Arp0rIs AuIh0rIy
0I Ngcr (FAAN) nd Ngcrn P0rIs AuIh0rIy (NPA).
Thcr mn c0mm0n IuncI0n s I0 pr0vdc vluc I0r m0ncy scrvccs.
3
\luc I0r M0ncy (\FM) rcplccs Ihc Icrm c0sIcIIccIvcncss by brngng
n clcmcnI 0I qulIy n scrvcc. !n Ihc publc sccI0r, I cn bc Ikcn s
whI pr0II s I0 Ihc prvIc sccI0r. !I s IhI 0b|ccIvc whch Ihc publc
sccI0r mngcrs, wh0 rc n0I l00kng I0r pr0II, sh0uld Iry I0 chcvc.
crnrd M. 10ncs (99b) mcnI0ncd Ihrcc c0mp0ncnIs:
cc0n0my, cIIccncy nd cIIccIvcncss nd dcIncd Ihcm, n
Icrms 0I npuI, 0uIpuI nd 0uIc0mc, s I0ll0ws:
() : C0nvcrs0n 0I Ihc prmry npuI (csh)
nI0 Ihc usblc scc0ndry npuIs sIII, c0nsumblc
nd cpIl Icm.
(b) : C0nvcrs0n 0I Ihc usblc rcs0urcc nI0
0uIpuI, I0r cxmplc, mkng Ihc bcsI usc 0I buldngs
nd cqupmcnI.
(c) Ensurng IhI Ihc cIIccnIly
pr0duccd 0uIpuIs rc drccIcd I0 chcvng Ihc dcsrcd
0uIc0mc.
!n usng \FM ppr0ch, Ihc rcqurcd 0uIc0mcs musI hvc
bccn pr0pcrly spccIcd nd n ppr0prIc m0nI0rng nd
c0nIr0l sysIcm puI n plcc.
Thc pr0blcms 0I vluc I0r m0ncy ppr0ch rc:
() : 0uIc0mcs cnn0I bc csly
qunIIcd. Ths mkcs m0nI0rng dIIculI.
(b) : AsscssmcnI 0I qulIy 0I
0uIc0mc nv0lvcs vluc |udgcmcnI. 000d 0r bd
qulIy wll dcpcnd 0n wh0 s d0ng Ihc cvluI0n.
Thc 0b|ccIvcs 0I busncss 0rgnsI0ns rc mny, nd n prcIcc, n0
c0mpny pursucs 0nc snglc 0b|ccIvc. whcn Ihc p0ssblc Inncl 0b|ccIvcs
4
0I n 0rgnsI0n rc sscsscd, Ihc gcncrl c0nscnsus m0ng Inncc
prcII0ncrs s IhI shrch0ldcrs' wclIh mxmsI0n sh0uld bc Ihc
d0mnnI 0b|ccIvc.
H0wcvcr, Ihcrc s sIr0ng c0nIcndcr whch s rcgrdcd s lIcrnIvc I0
shrch0ldcrs' wclIh mxmsI0n, Ihs 0b|ccIvc cmphszcs sIkch0ldcrs'
nIcrcsIs s gnsI Ihc nIcrcsI 0I gr0up - Ihc 0rdnry shrch0ldcrs. Ths,
n0IwIhsIndng, Ihc 0pcrI0rs n Ihc cpIl mrkcI sIll bclcvc IhI
shrch0ldcrs wclIh mxmsI0n sh0uld bc pursucd by Inncl mngcrs.
Thc p0nI hcrc s IhI pr0vdcrs 0I Inncc hvc lIcrnIvc wys 0I nvcsIng
Ihcr Iunds: rskIrcc sccurIcs (Ircsury blls), l0wrsk g0vcrnmcnI b0nds
nd hghrsk cquIcs. !I Ihcy hvc I0 chnncl Ihcr Iunds nI0 cquIcs, Ihcy
rcqurc prcmum. Thc 0nly IIrcI0n I0 Ihcm, n Ihs csc s Ihc rcsduc
IhI wll rcmn IIcr ll 0Ihcr nIcrcsIs hvc bccn sIsIcd. Asdc Ir0m Ihc
b0vc 0b|ccIvcs, Ihcrc rc 0Ihcr 0b|ccIvcs whch rc crIcl I0 Ihc
chcvcmcnI 0I Ihc shrch0ldcrs' wclIh mxmsI0n nd whch sh0uld
ls0 bc 0I c0nccrn I0 Inncl mngcrs. Thcsc rc Ihc 0rgnsI0n's n0n
Inncl 0b|ccIvcs.
A c0mpny, 0I c0ursc, d0cs n0I sInd l0nc, I s prI 0I Ihc s0ccIy nd Ihc
cnvr0nmcnI n whch I 0pcrIcs. !I IhcrcI0rc 0wcs ccrIn s0cl nd cIhcl
0blgI0ns I0 Ihc pc0plc n Is cnvr0nmcnI.
A publc sccI0r 0rgnsI0n hs vlucI0rm0ncy s Is 0b|ccIvc rIhcr Ihn
pr0II m0Ivc.
2.5.
. Thc dcl 0b|ccIvc 0I mngcrs n Ihc mngcmcnI 0I busncss
0rgnsI0n sh0uld bc I0:
A Mnmsc C0sI
Mxmsc pr0IIs
C Mxmsc shrch0ldcrs wclIh nd rclcgIc Ihc nIcrcsI 0I 0Ihcr
gr0ups
0 Mxmsc shrch0ldcrs wclIh buI gvc duc IIcnI0n I0 0Ihcr
nIcrcsI gr0ups
E Mxmsc Ihc nIcrcsIs 0I ll gr0ups
5
2. Thc 0b|ccIvc 0I n0I I0r pr0II 0rgnsI0n sh0uld bc
A C0sI cIIccIvcncss
Pr0II mxmsI0n
C Shrch0ldcrs wclIh mxmsI0n
0 \luc I0r m0ncy
E MrkcI p0sI0n
3. !n Icrms 0I gl0bl busncss cIvIcs whI s IhI 0b|ccIvc IhI s usully
rcgrdcd s n lIcrnIvc I0 shrch0ldcrs wclIh mxmsI0n!
A L0ngIcrm sIblIy
L0ngIcrm gr0wIh
C C0rp0rIc wclIh mxmsI0n
0 Shrc prcc mxmsI0n
E C0sI mnmsI0n
4. !n busncss 0rgnsI0n, Ihc 0vcrll c0rp0rIc 0b|ccIvc sh0uld bc Ihc
c0mpny's,
A MrkcIng 0b|ccIvc
Tcchn0l0gcl 0b|ccIvc
C Pr0ducI0n 0b|ccIvc
0 Fnncl 0b|ccIvc
E Pcrs0nncl 0b|ccIvc
5. whch 0I Ihc I0ll0wng sh0uld N0T bc Ihc s0cl 0b|ccIvc 0I busncss
0rgnsI0n vsvs Ihc g0vcrnmcnI!
A Py Ix s I whcn duc
0bcy lws cncIcd by Ihc NI0nl Asscmbly
C Kccp clcn cnvr0nmcnI
0 Enc0urgc Ix v0dncc
E Enc0urgc Ix cvs0n
2.5.2
. whI sh0uld bc Ihc 0b|ccIvc 0I c0mpny wIh rcspccI I0 Ihc l0cl c0m
munIy n whch I 0pcrIcs!
2. SIIc 0nc rcs0n why busncss 0rgnsI0n sh0uld hvc n 0vcrll
0b|ccIvc.
3. whI s Ihc Icrm gvcn I0 sIuI0ns whcrc mngcrs mkc dccs0ns
whch rc n0I n lnc wIh Ihc 0vcrll sIrIcgc 0b|ccIvc 0I Ihc busncss!
4. SIIc 0nc m|0r pr0blcm 0I Ihc 0b|ccIvc 0I n0II0rpr0II 0rgnsI0n.
5. SIIc 0nc sh0rIc0mng 0I pr0II mxmsI0n s n 0b|ccIvc.
b
7
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ Expln gcncy Ihc0ry,
+ 0cInc gcncy rclI0nshp nd gvc rclcvnI cxmplcs 0I such rclI0nshps,
+ !dcnIIy nd cxpln rcs 0I p0IcnIl c0nIlcI 0I nIcrcsIs n gcncy rclI0nshps,
+ Expln g0l c0ngrucncc, nd
+ McnI0n nd cxpln cI0ns ncccssry I0 chcvc g0l c0ngrucncc.
Agcncy Ihc0ry pr0vdcs Ihc Irmcw0rk I0r dscussng Ihc rclI0nshps IhI
cxsI bcIwccn Ihc vr0us nIcrcsI gr0ups n n 0rgnsI0n. !I vcws Ihc
Irm s c0mp0sIc unI c0nssIng 0I scprIc nIcrcsI gr0ups. Ech nIcrcsI
gr0up pursucs Is 0wn nIcrcsI nd cnsurcs I sInds I n dvnIgc0us
p0sI0n n rclI0n I0 Ihc Irm. Ech ndvdul gr0up h0wcvcr rcc0gnscs
Ihc IcI IhI Is succcss s IuncI0n 0I Ihc c0mpny vsvs 0Ihcr c0mpncs
n Ihc smc ndusIry. Thc Ihc0ry brngs 0uI clcr cxp0sI0n 0I Ihc cI0ns 0I
s0mc mngcrs whch rc n0I n c0ns0nncc wIh Ihc cI0ns Ihcy wcrc I0
Ikc, ssumng shrch0ldcrs' wclIh mxmsI0n 0b|ccIvc s pursucd.
Agcncy rclI0nshp cxsIs whcn 0nc pcrs0n (0r gr0up 0I pcrs0ns) cllcd
Ihc Prncpl, pp0nIs n0Ihcr pcrs0n cllcd Ihc AgcnI, I0 pcrI0rm s0mc
w0rk 0n Is bchlI nd gvcs Ihc gcnI Ihc ppr0prIc dccs0nmkng
uIh0rIy. !n Ihc c0nIcxI 0I SIrIcgc Fnncl MngcmcnI, such rclI0nshps
0ccur, m0ng 0Ihcrs, bcIwccn:
() Shrch0ldcrs nd mngcrs, nd
(b) CrcdI0rs nd shrch0ldcrs.
!I s nIurl IhI whcrc such rclI0nshp cxsIs, Ihcrc s b0und I0 bc c0nIlcI
0I nIcrcsI whch crcIcs pr0blcm kn0wn s 'gcncy pr0blcm.' Thc rcs0n
8
undcrlnng Ihc c0nIlcI n Ihc csc 0I shrch0ldcrsmngcrs rclI0nshp,
s Ihc scprI0n 0I 0wncrshp nd c0nIr0l.
Thc rcs0n undcrlnng Ihc c0nIlcI s Ihc scprI0n 0I 0wncrshp nd c0nIr0l.
Ths my rsc n Ihc I0ll0wng sIuI0ns:
()
!n pursuI 0I Ihcr sclInIcrcsIs, mngcrs my prcIcr pr0|ccIs wIh
sh0rI lvcs s gnsI Ih0sc wIh l0ng lvcs. Thcy my IhcrcI0rc, wnI
I0 usc Pybck Icchnquc nsIcd 0I Ihc supcr0r NcI PrcscnI \luc
Icchnquc.
(b)
Fnncl mngcrs my n0I wnI I0 undcrIkc pr0|ccIs whch brng
subsInIl bcncIIs I0 Ihc 0wncrs, buI rc hghly rsky, bccusc 0I
Ihc ncgIvc mpcI 0I Ihs rsk 0n Ihcr 0wn Inncl p0sI0n.
H0wcvcr, Ihs rsk hs prcsumbly bccn wcll dvcrsIcd wy by Ihc
shrch0ldcrs.
(c)
Fnncl mngcrs my n0I wnI Ihc c0mpny's dcbI I0 bc unduly
lrgc n rclI0n I0 cquIcs s0 s I0 rcducc Ihc Inncl rsk 0I Ihc
c0mpny. Fnncl mngcrs my h0wcvcr, by d0ng Ihs, n0I bc
Ikng dvnIgc 0I IxdcducIblc nIcrcsI c0sI, whcrc nIcrcsI s
IrcIcd by Ihc Ix uIh0rIcs s chrgc gnsI pr0IIs.
(d)
Ths s whcrc c0mpny cqurcs Ihc shrcs 0I n0Ihcr c0mpny I0r
Ihc rcs0n IhI I wnIs I0 dvcrsIy Is 0pcrI0ns. H0wcvcr, sncc
rI0nl shrch0ldcrs rc cxpccIcd I0 dvcrsIy Ihcr nvcsImcnIs,
Inncl mngcrs wll 0nly bc ddng vluc I Ihcy cn 0bIn grcIcr
rcIurn Ihn whI Ihc shrch0ldcrs Ihcmsclvcs w0uld hvc g0IIcn.
(c)
whcn c0mpny s c0mpuls0rly Ikng 0vcr n0Ihcr c0mpny, Ihc
IrgcI c0mpny's drccI0rs my bc rcssIng such cI0n n 0rdcr I0
pr0IccI Ihcr 0wn |0bs, cvcn Ih0ugh I wll brng grcIcr wclIh I0 Ihc
cxsIng shrch0ldcrs.
9
(I)
!n lcvcrgcd buy0uI, Ihc c0mpny's mngcmcnI b0rr0ws Iunds
I0 purchsc Ihc 0uIsIndng shrcs 0I Ihc c0mpny v Icndcr 0IIcr
(n 0IIcr I0 buy Ihc shrcs 0I c0mpny drccIly Ir0m Ihc shrch0ldcrs).
Thcrc s Ihc p0ssblIy IhI mngcrs mghI Iry I0 drvc d0wn Ihc
prcc 0I Ihc c0mpny's shrc |usI bcI0rc Ihc Icndcr 0IIcr, s0 IhI Ihcy
cn buy Ihc shrcs I brgn prcc.
(g)
Ths s whcrc Inncl mngcrs rc pursung n unduly c0nscrvIvc
dvdcnd p0lcy: IhI s, Iryng I0 kccp dvdcnds I lcvcl whch s
much l0wcr Ihn Ihc n0rml lcvcl, gvcn Ihc ndusIry n0rms. Thc
qucsI0n, h0wcvcr, s: cn Ihc Iunds n0I dsIrbuIcd bc uIlscd bcIIcr
by Ihc shrch0ldcrs Ihcmsclvcs, I rcccvcd s dvdcnds!
(h)
Ths s whcrc Inncl mngcrs 'pnI' Ihc Inncl c0ndI0n 0I Ihc
c0mpny, v Is blncc shccI, r0scr Ihn whI I rclly s. Ths s
kn0wn s 'wnd0w drcssng' 0r, n mld I0rm, 'crcIvc cc0unIng'.
!I s mdc p0ssblc by Ihc 0pcncndcd nIurc 0I Ihc ch0cc 0I
cc0unIng p0lccs, whcn drccI0rs prcprc Inncl sIIcmcnIs. F0r
cxmplc, drccI0rs mghI wnI I0 dcIcr ccrIn Iypc 0I cxpcndIurc
(c.g. dvcrIsng) nd cpIlsc I 0r puI vluc 0n nIngblcs such s
pIcnIs.
()
T0p mngcmcnI mghI dsply ccrIn uncIhcl prcIccs whcn I
mkcs s0mc dccs0ns 0n 0pcrI0ns. Typcl cxmplcs 0I such
prcIccs rc Ihc dcgrdI0n 0I Ihc cnvr0nmcnI Ihr0ugh p0lluI0n
nd IcsIng 0I pr0ducIs 0n humn bcngs.
Shrch0ldcrs nccd I0 cnsurc IhI Ihcrc s . 00l
c0ngrucncc mcns c0nvcrgcncc 0I Ihc nIcrcsIs 0I dIIcrcnI gr0ups
such IhI Ihc 0vcrll g0l 0I Ihc c0mpny cn bc chcvcd. Hcrc, I
mcns Ihc nccd I0r shrch0ldcrs I0 cnsurc IhI mngcrs Ikc cI0ns
n cc0rdncc wIh Ihcr cxpccII0ns nd n Ihcr bcsI nIcrcsI.
Thc cI0ns ncccssry I0 chcvc g0l c0ngrucncc rc s I0ll0ws:
20
()
Thc 'c0mpny' nccds I0 m0nI0r cvcry cI0n 0I mngcmcnI.
H0wcvcr, s0mc c0sIs kn0wn s gcncy c0sIs w0uld bc ncurrcd.
Ths s n cxpcnsvc wy 0I cnsurng g0l c0ngrucncc. Agcncy
c0sIs w0uld ncludc cxpcndIurc IhI s ncccssry I0 physclly
m0nI0r Ihc mngcr nd cxpcndIurc I0 rcsIrucIurc Ihc
0rgnsI0n s0 IhI bd clcmcnIs wIhn Ihc sysIcm rc
rcm0vcd. Thcy ls0 ncludc 0pp0rIunIy c0sIs rsng Ir0m pr0IIs
l0sI whcn mngcrs Ikc dccs0ns s gcnIs nsIcd 0I s
0wncrmngcrs, dccs0nmkng s sl0w n Ihc I0rmcr buI
IsI n Ihc lIIcr.
(b)
!n Ihs csc c0sIs mghI n0I bc I00 pr0hbIvc s mngcrs
w0uld gcr Ihcr cII0rIs I0wrd pr0IIblIy nd cpIl
pprccI0n v cuIIng d0wn 0pcrI0nl c0sIs ncludng
slrcs nd Irngc bcncIIs nd Ikng lcss Imc 0II duIy.
!n bcIwccn Ihc b0vc Iw0 cxIrcmc p0sI0ns rc Ihc I0ll0wng:
()
Ths my n0I bc cIIccIvc s 0wncrshp n mny bg
c0mpncs (whcrc 0wncrshp nd c0nIr0l rc hghly
scprIcd) s wdcly dspcrscd nd shrch0ldcrs 0IIcn
Ind I dIIculI I0 spck wIh 0nc v0cc. Fcw shrch0ldcrs
IIcnd Ihc nnul gcncrl mccIngs nd, n ny csc,
drccI0rs usully cnsurc Ihcy gcI cn0ugh pr0xcs I0
supp0rI Ihcm I mccIngs. !I sh0uld bc n0Icd, h0wcvcr,
IhI Ihc prcscncc 0I nsIIuI0nl nvcsI0rs c0uld wckcn
Ihc drccI0rs' sIrcngIh.
()
Ths c0uld dcIcr mngcrs Ir0m Ikng cI0ns IhI wll
bc I vrncc wIh shrc prcc mxmsI0n. !I Ihc
c0mpny's crnngs p0IcnIls rc bcng kn0wngly 0r
unkn0wngly supprcsscd Ihr0ugh bd p0lccs nd Ihc
shrc s c0nscqucnIly undcrvlucd, n rclI0n I0 Is Iruc
vluc, I my bc cxp0scd I0 h0sIlcIkc0vcr bd. Thc
rcsulI s IhI s0mc I0p mngcrs mghI l0sc Ihcr |0bs
2
nd Ihc uIh0rIcs 0I Ih0sc rcmnng mghI bc
drsIclly rcduccd.
()
Ths s pcrI0rmnccbscd schcmc IhI ll0ws I0p
mngcrs I0 buy Ihc shrcs 0I Ihc c0mpny n IuIurc, I
prcc dcIcrmncd n0w. Thc bclcI s IhI Ihs wll
m0IvIc Ihc mngcrs I0 c0nInully Ikc cI0ns IhI
wll bc pushng up Ihc shrc prcc: Ihc 0pI0n 0nly hs
vluc I Ihc prcc 0I Ihc shrc ncrcscs b0vc Ihc
0rgnlly Ixcd 0pI0n purchsc prcc. !I sh0uld bc n0Icd,
h0wcvcr IhI Ihs schcmc my n0I bc bcncIcl I0
mngcrs n pcr0d 0I mrkcI d0wnIurn.
(v)
Thcsc rc shrcs gvcn I0 I0p mngcrs nd lnkcd I0
Ihc c0mpny's pcrI0rmncc s mrr0rcd by Is
IundmcnIls - crnngs pcr shrc, rcIurn 0n cpIl
cmpl0ycd, rcIurn 0n cquIy, dvdcnd pcr shrc nd s0
0n. Ths schcmc s vlublc I0 Ihc cxIcnI IhI I s n0I
IIccIcd by vgrcs 0I Ihc sI0ck mrkcI.
Thc gcncy pr0blcm 0I crcdI0rs nd shrch0ldcrs (wIh mngcrs s gcnIs)
rscs Ir0m Iw0 sIuI0ns:
()
CrcdI0rs w0uld n0I lkc sIuI0n whcrc Ihc cccpIncc 0I pr0|ccI
wll dd grcIcr busncss rsk Ihn s cxpccIcd by Ihcm. !I Ihs hppcns,
Ihcy wll ncrcsc Ihcr rcqurcd rIc 0I rcIurn nd Ihc vluc 0I Ihcr
0uIsIndng dcbI wll Ill. Thc m|0r c0nccrn 0I crcdI0rs hcrc s IhI
I rsky pr0|ccI succccds, crcdI0rs wll 0nly rcccvc Ixcd m0unI
(nIcrcsI nc0mc) nd shrch0ldcrs wll Ikc ll Ihc bcncIIs' whcrcs,
I Ihc pr0|ccI Ils, Ihcy wll shrc Ihc l0sscs wIh Ihc 0wncrs.
(b)
whcrc Ihc c0mpny ncrcscs Is gcrng (dcbI/cquIy) rI0 I0 lcvcl
IhI ncrcscs Is Inncl rsk I0 m0rc Ihn cxpccIcd, Ihc vluc 0I Ihc
cxsIng dcbI wll Ill bccusc Ihc crnngs nd sscIs bckng
vlblc I0r Ihs dcbI wll dmnsh s rcsulI 0I Ihc ncw ssuc 0I
dcbI.
22
Shrch0ldcrs d0 Iry s much s p0ssblc n0I I0 cxpl0I crcdI0rs s
such cI0n my IIrcI punIvc hgh nIcrcsI rIcs, rcsIrcIvc
c0vcnnIs, rcsIrcIcd cccss I0 cpIl mrkcI, ll 0I whch my rcsulI
n Ill n Ihc l0ngIcrm vluc 0I Ihc c0mpny's shrc. Shrch0ldcrs
w0uld, IhcrcI0rc, wnI I0 c0nInuc I0 mnIn g00d nd c0rdl
rclI0nshp wIh Ihcr crcdI0rs, s I s by d0ng s0, IhI Ihcr wclIh
wll bc mxmscd.
Agcncy Ihc0ry pr0vdcs Ihc ncccssry Irmcw0rk I0r Ihc dscuss0n 0I gcncy
rclI0nshps IhI cxsI wIhn Ihc Irm, Ihc c0nIlcI 0I nIcrcsI IhI mghI
rsc Ir0m such rclI0nshps nd Ihc p0ssblc cI0ns nd cvcnIs IhI c0uld
mIgIc such c0nIlcI. Tw0 m|0r rclI0nshps rc rclcvnI n Ihc c0nIcxI 0I
Ihc dscuss0n - shrch0ldcrs nd mngcrs, crcdI0rs nd shrch0ldcrs.
!n Ihc shrch0ldcrs nd mngcrs rclI0nshp, Ihcrc s b0und I0 bc c0nIlcI
0I nIcrcsIs n Ihc rcs 0I cpIl nvcsImcnI, gcrng, dvcrsIcI0n by I0p
mngcmcnI, Ikc0vcr bds nd s0 0n. Shrch0ldcrs cn h0wcvcr dcsgn
rclcvnI schcmcs I0 rcducc Ihs c0nIlcI. Als0, I s p0ssblc I0 hvc c0nIlcI 0I
nIcrcsI bcIwccn crcdI0rs nd shrch0ldcrs n Ihc rcs 0I sclccI0n 0I rsky
pr0|ccIs nd rsng 0I ddI0nl dcbI Inncc. !n Ihs csc, h0wcvcr, Ihcrc
rc nbulI c0nIr0ls 0n Ihc cI0ns 0I Ihc shrch0ldcrs whch Icnd I0 mkc
Ihcm I0 wnI I0 bc crcdI0rs' Ircndly m0sI 0I Ihc Imc.
3.b.
. whch 0I Ihc I0ll0wng pr0vdcs g00d cxmplc 0I gcncy rclI0nshp
n Iypcl busncss 0rgnsI0n!
A Empl0yccs nd g0vcrnmcnI.
Empl0yccs nd crcdI0rs
C CrcdI0rs nd shrch0ldcrs
0 CrcdI0rs nd g0vcrnmcnIs
E 0cbI0rs nd crcdI0rs
2. !n ll Ihcsc spccIc rcs 0I gcrng Ihcrc rc c0nIlcIs 0I nIcrcsI bcIwccn
shrch0ldcrs, mngcrs EXCEPT.
A !ncrcsc gcrng nd ncrcsc IxdcducIblc nIcrcsI c0sI.
Rcducc gcrng nd rcducc Ix dcducIblc nIcrcsI c0sI.
23
C Rcducc gcrng nd rcducc rsk
0 00 n0Ihng
E !ncrcsc gcrng nd rcducc Ix dcducIblc nIcrcsI c0sI.
3. whch 0I Ihc I0ll0wng s N0T wy 0I cnsurng g0l c0ngrucncc n
c0nnccI0n wIh Agcncy Thc0ry!
A UnlmIng Ihc cIvIcs 0I Ihc b0rd
ThrcI 0I dsmssl
C LqudI0n 0I Ihc c0mpny
0 ThrcI 0I Ikc0vcr bd
E C0mpcnsI0n Ihr0ugh ll0cI0n 0I shrcs.
4. whch 0I Ihc I0ll0wng s N0T ncludcd n gcncy c0sIs!
A Annul slrcs 0I I0p cxccuIvcs
ExIr pymcnIs s pcrqusIcs
C Physcl m0nI0rng c0sIs
0 0rgnsI0n rcsIrucIurng c0sIs
E Pr0IIs l0sI whcn mngcrs cI s gcnI nsIcd 0I s 0wncr
mngcr
5. !n whI wy mghI cxp0surc I0 Ikc0vcr bd cnc0urgc mngcrs I0
pursuc g0l c0ngrucncc! 0cIcrrcncc Ir0m,
A mkng lrgc b0rr0wng
pyng Ihcr cmpl0yccs II slrcs.
C 0IIcrng g00d wclIrc pckgcs
0 dvcrsIyng Ihc c0mpny's 0pcrI0n
E supprcssng Ihc p0IcnIls 0I Ihc c0mpny.
3.b.2
. !n rclI0n I0 pprsl 0I cpIl pr0|ccIs, sIIc 0NE rc IhI c0uld crcIc
c0nIlcI 0I nIcrcsI bcIwccn shrch0ldcrs nd mngcrs.
2. whI s Ihc Icrm gvcn I0 Ihc cI0n 0I mngcrs whcn Ihcy Iry I0 gvc
Ihc mprcss0n 0I r0sy Inncl c0ndI0n 0I Ihc c0mpny (v Ihc
blncc shccI) whcn I s n rclIy n0I Ihc csc!
3. SIIc 0nc IcI0r IhI mghI n0I rclly mkc pcrI0rmncc shrcs I0 bc
cIIccIvc s n nsIrumcnI 0I g0l c0ngrucncc.
4. 0vc 0nc rcs0n why IhrcI 0I dsmssl my n0I rcducc c0nIlcI 0I nIcrcsI
bcIwccn shrch0ldcrs nd mngcrs!
5. SIIc 0nc wy n whch lcvcrgcd buy0uI crcIcs c0nIlcI 0I nIcrcsI
bcIwccn shrch0ldcrs nd mngcrs.
25
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ UndcrsInd Ihc rudmcnIs n 0rgnsI0nl mngcmcnI,
+ ApprccIc Ihc r0lcs 0I Ihc 0rd nd mngcmcnI,
+ UndcrsInd cIhcl ssucs n C0rp0rIc 00vcrnncc, nd
+ Kn0w Ihc mp0rIncc nd gcncrl prncplcs 0I C0rp0rIc 00vcrnncc.
!n I0dy's gl0bl cc0n0my, Ihc succcss 0I Ihc nI0nl cc0n0my dcpcnds 0n
Ihc crucl r0lc 0I c0mpny's c0mpcIIvcncss, Irnsprcncy nd g0vcrnncc
sIrucIurc whch 0pcrIc wIhn hcr IcrrI0ry, sncc c0mpncs rc Ihc cnIIcs
IhI crcIc cc0n0mc vluc.
0yI0n (984) dcIncd C0rp0rIc 00vcrnncc s Ihc pr0ccss, sIrucIurcs nd
rclI0nshps Ihr0ugh whch Ihc b0rd 0I drccI0rs 0vcrsccs whI Ihc
cxccuIvcs d0 I0 chcvc Ihc 0b|ccIvc 0I Ihc c0mpny.
Mucllcr (98) 0pncd IhI "g0vcrnncc s c0nccrncd wIh Ihc nIrnsc
nIurc, purp0sc, nIcgrIy nd dcnIIy 0I Ihc nsIIuI0n, wIh prmry I0cus
0n Ihc cnIIy's rclcvncc, c0nInuIy nd Iducry spccIs. 00vcrnncc
nv0lvcs m0nI0rng nd 0vcrsccng sIrIcgc drccI0n, s0c0cc0n0mc nd
culIurl c0nIcxI, cxIcrnlIcs nd c0nsIIucnccs 0I Ihc nsIIuI0n".
Thc m0sI pI s0urcc 0I nIcrnI0nl bcsI prcIccs llusIrIcd hcrc s drwn
Ir0m Ihc C0mm0nwclIh Ass0cI0n I0r C0rp0rIc 00vcrnncc (CAC0),
Cdbury Rcp0rI nd Srbncs0xlcy Rcp0rI, 0udclncs whch wcrc lrgcly
I0ll0wcd by kng 2 (S0uIh AIrc 2002) nd Ihc C0dc 0I C0rp0rIc 00vcrnncc
I0r C0mpncs n Ngcr (2003). Smlr gudclncs, lbcI m0rc dcIlcd,
cxsI n Ihc USA nd c0unIrcs n Eur0pc whch ddrcss:
() R0lcs, rcsp0nsblIy, cpcIy, nd pcrI0rmncc, nd
() EIIccIvc 0clcgI0n.
2b
() Algnng nd cmbcddng vlucs nd prncplcs, nd
() !nI0rmng sIrIcgc plnnng nd p0lcy I0rmulI0n.
() AsscssmcnI 0I rsks nd rcsp0nsblIcs.
() 0csgn nd mplcmcnII0n 0I mngcmcnI sysIcms, nd
() Pr0vdng ssurncc 0vcr mngcmcnI sysIcms.
() SclccI0n nd m0nI0rng 0I kcy pcrI0rmncc ndcI0rs.
() UndcrsIndng sIkch0ldcr nccds nd cxpccII0ns, nd
() EsIblshng cIIccIvc c0mmuncI0n mcchnsms.
() Acc0unIng dscl0surcs,
() C0nIr0ls,
() !nIcrnl udI,
(v) ExIcrnl udI,
(v) Fnncl 0r Acc0unIng SIndrds, nd
(v) Fnncl Rcp0rIng.
() ExccuIvc,
() AudI,
() RcmuncrI0n,
(v) N0mnI0n,
(v) Rsk mngcmcnI, nd
(v) Spccl.
() C0rp0rIc 00vcrnncc ms I0 pr0m0Ic culIurc n whch 0rccI0rs
wll gvc pr0rIy I0 Ihc cIhcl pursuI n Ihc shrch0ldcrs' bcsI nIcrcsI,
(b) C0rp0rIc 00vcrnncc ll0ws rcvcw 0I udI rcgulI0ns, c0rp0rIc
dscl0surc Irmcw0rk nd shrch0ldcr prIcpI0n, I0 mpr0vc Ihc
27
cc0unIblIy nd Irnsprcncy 0I c0mpncs, c0mplncc I0 sIIuI0ry
rcgulI0n, bcsI cIhcl prcIccs, c0nsumcr pr0IccI0n nd s0 0n,
(c) !I cnsurcs IhI Ihc udI c0mmIIcc sssIs Ihc 0rd 0I 0rccI0rs n
mngng Ihc ccurcy nd nIcgrIy 0I Ihc Inncl sIIcmcnIs 0I
Ihc c0mpny, cnsurng c0mplncc wIh Ihc lcgl nd rcgulI0ry
rcqurcmcnIs, nd Ihc cIIccncy 0I Ihc c0mpny's nIcrnl udI
IuncI0ns,
(d) !I cnsurcs Ihc crcdblIy 0I c0mpncs, nd Ihc cxsIcncc 0I
mngcrl sysIcm whch pr0m0Ics crcIvc cnIrcprcncurshp,
(c) C0rp0rIc 00vcrnncc hclps n mxmsng Ihc c0rp0rIc vluc by
cnhncng Irnsprcncy nd cIIccncy,
(I) Thc r0lc 0I C0rp0rIc 00vcrnncc s I0 prcvcnI Ihc cxpl0II0n 0I
nvcsI0rs by Ihc mngcrs,
(c) 000d C0rp0rIc 00vcrnncc prcvcnIs IrudulcnI prcIccs Ihr0ugh Ihc
mcchnsms dcsgncd by Ihc 0rd nd mngcmcnI, nd
(h) C0rp0rIc 00vcrnncc cnsurcs IhI Ihc supplcrs 0I Inncc I0
c0mpncs hvc Ihcr rcwrds.
Thcrc s n0 0nc bcsI prncplc 0I g00d C0rp0rIc 00vcrnncc I0 bc d0pIcd by
ll c0mpncs. C0mpncs sh0uld dcsgn nd mplcmcnI sIrIcgcs n lghI
0I rcgulI0ry Irmcw0rk IhI wll pr0ducc n cIIccnI, qulIIvc nd rcsulI
0rcnIcd 0uIc0mc, I0r 0pImsng c0rp0rIc pcrI0rmncc nd cc0unIblIy,
n Ihc nIcrcsI 0I shrch0ldcrs nd Ihc br0dcr cc0n0my.
000d c0rp0rIc g0vcrnncc sh0uld bc dcsgncd n lnc wIh Ihc crcumsInccs
surr0undng cch cnIIy nd c0nInu0usly rcvcwcd cc0rdng I0 Ihc chngng
crcumsInccs 0I Ihc Imc. H0wcvcr, I0r Ihc gudncc 0I c0mpncs, whch
nIcnd I0 c0mpcIc nIcrnI0nlly nd rsc mngcrl cIIccncy, Ihc
I0ll0wng rc rcc0mmcndcd s bsc prncplcs 0I c0rp0rIc g0vcrnncc I0
bc d0pIcd:
() Ly s0ld I0undI0ns I0r mngcmcnI nd 0vcrsghI,
(b) SIrucIurc Ihc 0rd I0 dd vluc,
(c) Pr0m0Ic cIhcl nd rcsp0nsblc dccs0n mkng,
(d) SIcgurd Ihc nIcgrIy 0I Inncl rcp0rIng,
28
(c) Mkc c0nInu0us, Imcly nd crcdblc dscl0surcs I0 Ihc SI0ck
Exchngc,
(I) RcspccI Ihc rghIs 0I shrch0ldcrs,
(g) Rcc0gnsc nd mngc rsk,
(h) Adhcrc I0 Ngcr's C0rp0rIc 00vcrnncc C0dc 0I C0nducI I0r c0mpny
drccI0rs publshcd n 2003 undcr Ihc cgs 0I SccurIcs nd Exchngc
C0mmss0n,
() Enc0urgc cnhnccd pcrI0rmncc cvluI0n,
(|) RcmuncrIc Irly nd rcsp0nsbly, nd
(k) Rcc0gnsc Ihc lcgImIc nIcrcsI 0I sIkch0ldcrs.
Thc c0mpny's Irmcw0rk nccd I0 bc dcsgncd n such wy s I0 I0rmlsc
nd dscl0sc Ihc IuncI0ns rcscrvcd I0 Ihc 0rd nd Ih0sc dclcgIcd I0 Ihc
mngcmcnI.
Thc clrIcI0n 0I rcspccIvc r0lcs nd rcsp0nsblIcs bcIwccn Ihc 0rd
mcmbcrs nd scn0r mcmbcrs 0I Ihc cxccuIvcs (0r Ihc mngcmcnI) ncludc:
() Ensurng IhI Ihcrc s blncc 0I uIh0rIy s0 IhI n0 snglc ndvdul
hs unlmIcd p0wcrs,
(b) Enblng Ihc 0rd I0 pr0vdc sIrIcgc gudncc I0r Ihc c0mpny by
0vcrsccng c0rp0rIc sIrIcgy nd pcrI0rmncc 0b|ccIvcs, rcvcwng
nd rIIyng rsk mngcmcnI, m0nI0rng scn0r mngcmcnI's
pcrI0rmncc, s wcll s m|0r cpIl cxpcndIurc nd Inncl
rcp0rIng, nd
(c) Ensurng IhI pr0ccsscs rc n plcc I0r mnInng Ihc nIcgrIy 0I
Ihc Inncl sIIcmcnIs, cnsurng c0mplncc wIh Ihc prcscrbcd
lw nd cIhcs, nd Ihc c0rdl rclI0nshp wIh Ihc cusI0mcrs,
supplcrs nd Ihc sIkch0ldcrs.
H0wcvcr, Ihc 0rd, h0ldng c0mprchcnsvc p0wcr 0vcr Ihc c0rp0rIc
mngcmcnI, sh0uld pcrI0rm Ihc I0ll0wng dccs0n mkng IuncI0ns:
() ScIIng busncss g0ls nd sIrIcgcs,
(b) Appr0vng busncss plns nd budgcIs,
(c) Supcrvsng mngcmcnI nd cvluIng mngcmcnI pcrI0rmncc,
29
(d) Rcplcng Ihc mngcmcnI s ppr0prIc, nd rcvcwng Ihcr
rcmuncrI0n,
(c) M0nI0rng m|0r cpIl cxpcndIurcs nd c0rp0rIc Ikc0vcrs,
(I) McdIng n rcs0lvng c0nIlcIng nIcrcsIs m0ng Ihc drccI0rs,
mngcmcnI nd shrch0ldcrs,
(g) Ensurng nIcgrIy 0I Ihc cc0unIng nd Inncl rcp0rIng sysIcms,
(h) Supcrvsng Ihc c0mplncc wIh sIIuIcs nd pr0Icss0nl cIhcs,
() M0nI0rng Ihc cIIccIvcncss 0I g0vcrnncc prcIccs,
(|) 0vcrsccng Ihc pr0ccss 0I nI0rmI0n dscl0surc, nd
(k) Rsk mngcmcnI.
!n 0rdcr I0 mngc nd drccI c0mpncs n Ihc nIcrcsI 0I vr0us
sIkch0ldcrs, Ihc 0rccI0rs nd Ihc 0rd shll pcrI0rm Ihcr duIcs IIhIully.
Thcsc cn bc ssurcd 0nly Ihr0ugh Ihc 'ndcpcndcncc' 0I 0pn0n 0I cch 0I
Ihc 0rccI0rs. !n ddI0n, s0mc 0I Ihc sd drccI0rs musI bc ndcpcndcnI.
An 'ndcpcndcnI' drccI0r s dcscrbcd s 0nc wh0 cIs ndcpcndcnIly 0I
mngcmcnI nd s Ircc Ir0m ny busncss rclI0nshp 0r 0Ihcr rclI0nshp
IhI c0uld mIcrlly nIcrIcrc wIh 0r c0uld rcs0nbly bc pcrccvcd I0
mIcrlly nIcrIcrc wIh Ihc cxcrcsc 0I hs 0r hcr unIcIIcrcd nd unbscd
|udgcmcnI. An ndcpcndcnI drccI0r nccd n0I hvc ny shrch0ldng n Ihc
c0mpny buI brngs nI0 usc hs cxpcrcncc nd nIcgrIy n Ihc IIrs 0I Ihc
c0mpny.
!n sIrucIurng Ihc c0mp0sI0n 0I Ihc 0rd, Ihc r0lcs 0I Ihc Chrmn nd
ChcI ExccuIvc 0IIccr sh0uld bc clcrly scprIcd, 0Ihcrwsc, prcsdng
0rccI0r p0sI0n sh0uld bc csIblshcd I0 chcckmIc Ihc cxccsscs 0I Ihc
Chrmn nd Ih0sc 0I Ihc ChcI ExccuIvc.
Thc rcpp0nImcnI 0I 0rccI0rs, (cxccuIvc nd n0n cxccuIvc), sh0uld n0I
bc uI0mIc nd Ihs sh0uld bc by r0II0n. 0cIls 0I drccI0rshp p0sI0ns,
whch nv0lvc sgnIcnI Imc c0mmImcnIs, sh0uld bc dscl0scd I0 Ihc
shrch0ldcrs pr0r I0 clccI0n.
30
!n pr0m0Ing g00d cIhcl nd rcsp0nsblc dccs0n mkng, c0mpncs rc
cnc0urgcd I0 I0rmulIc c0dc 0I cIhcs 0r c0nducI, IhI wll scrvc I0 gudc
Ihc 0rccI0rs, Ihc ChcI ExccuIvc 0IIccr nd 0Ihcr kcy cxccuIvc mcmbcrs,
s I0 Ihc prcIccs ncccssry I0 mnIn c0nIdcncc n Ihc c0mpny's
nIcgrIy.
Thc c0dc sh0uld ddrcss cIhcl ssucs, csIblsh c0mplncc sIndrds nd
pr0ccdurcs. !I sh0uld v0d c0nIlcIs 0I nIcrcsI. Thc c0dc sh0uld ssurc
c0nIdcnIlIy, Ir dclng, pr0vdc mcchnsms I0 rcp0rI uncIhcl bchv0r
nd cnsurc IhI dscplnry mcsurcs rc n plcc I0r ny v0lI0ns.
!n chcvng bcIIcr cIhcl nd rcsp0nsblc dccs0n mkng pr0ccsscs, Ihc
c0mpny sh0uld clrIy Ihc sIndrd 0I cIhcl bchv0ur rcqurcd 0I
c0mpny 0rccI0rs nd kcy cxccuIvc mcmbcrs wh0 hvc Ihc 0pp0rIunIy I0
mIcrlly nIlucncc Ihc nIcgrIy, sIrIcgy nd 0pcrI0n 0I Ihc busncss
nd Is Inncl pcrI0rmncc. Als0, Ihc c0mpny sh0uld publsh Is p0sI0n
c0nccrnng Ihc ssuc 0I 0rd nd cmpl0ycc Irdng n c0mpny sccurIcs
nd ss0cIcd pr0ducIs, whch 0pcrIc I0 lmI Ihc cc0n0mc rsk 0I Ih0sc
nvcsImcnIs.
!n cnsurng IhI bcIIcr dccs0ns rc mdc, 0rccI0rs sh0uld hvc bcIIcr
cccss I0 nI0rmI0n 0n pr0ducIs, cusI0mcrs' vcwp0nIs, mrkcI c0ndI0ns
nd crIcl sIrIcgc nd 0rgnsI0nl ssucs, wcll hcd 0I mccIngs.
Thc 0rccI0rs sh0uld bc cmp0wcrcd I0 scck Ihcr 0wn nI0rmI0n Ir0m Ih0sc
n Ihc c0mpny nd 0bIn IrsIhnd kn0wlcdgc 0I Ihc busncss.
!n 0rdcr I0 cnhncc Ihc nIcgrIy 0I Inncl rcp0rIng, Ihc c0mpny s
rcqurcd I0 puI n plcc, sIrucIurc 0I rcvcw nd uIh0rsI0n pr0ccdurcs
dcsgncd I0 cnsurc Ihc IruIhIul nd IcIul prcscnII0n 0I Ihc c0mpny's
Inncl p0sI0n. Thc sIrucIurc sh0uld ncludc pr0ccss whch cnsurcs Ihc
ndcpcndcncc nd c0mpcIcncc 0I Ihc c0mpny's cxIcrnl udI0rs nd n
udI c0mmIIcc IhI wll rcvcw nd c0nsdcr Ihc Inncl sIIcmcnIs.
!n chcvng Ihc bcsI prcIcc 0I c0rp0rIc g0vcrnncc, Ihc c0mpny's p0lccs
sh0uld rcqurc Ihc ChcI ExccuIvc 0IIccr nd Ihc ChcI Fnncl 0IIccr I0
sIIc n wrIng I0 Ihc 0rd IhI Ihc c0mpny's Inncl rcp0rIs prcscnI
Iruc nd Ir vcw, n ll mIcrl rcspccIs nd rc n cc0rdncc wIh rclcvnI
cc0unIng sIndrds. !n ddI0n, n udI c0mmIIcc sh0uld bc csIblshcd
I0 sccrIn IhI pr0ccsscs rc n plcc nd pr0ccdurc I0r m0nI0rng Ihcm
rc wcll cIcrcd I0r.
3
Thc c0mp0sI0n 0I Ihc udI c0mmIIcc sh0uld ncludc cqul numbcr 0I
ndcpcndcnI 0rccI0rs nd rcprcscnIIvcs 0I Ihc shrch0ldcrs I0 mxmum
0I sx, cc0rdng I0 S.359 (4) 0I CAMA (2003, s mcndcd). F0r pr0pcr
dschrgc 0I duIcs, ll mcmbcrs 0I Ihc udI c0mmIIcc sh0uld bc lIcrIc n
Inncl nd busncss mIIcrs nd hvc undcrsIndng 0I Ihc ndusIry n
whch Ihc c0mpny 0pcrIcs. !I s cxpccIcd IhI I lcsI 0nc mcmbcr sh0uld
hvc Inncl cxpcrIsc nd cducI0nl qulIcI0n 0I rcc0gnscd
pr0Icss0nl cc0unIng b0dy. H0wcvcr, ll mcmbcrs 0I Ihc udI c0mmIIcc
sh0uld bc sub|ccIcd I0 rcclccI0n, nnully.
C0mpncs rc 0blgcd I0 dscl0sc mIcrl nI0rmI0n n Imcly nd
ccurIc mnncr I0 Ihc shrch0ldcrs nd 0Ihcr sIkch0ldcrs. As Ihc c0mpny's
0blgI0n, ppr0prIc dscl0surc 0I c0rp0rIc nI0rmI0n I0 shrch0ldcrs
nd sIkch0ldcrs wll rsc Ihcr c0nIdcncc nd wll gvc cqul 0pp0rIunIy
I0 mrkcI prIcpnIs. Pr0pcr nd ccurIc dscl0surc wll prcvcnI unIr
prcIccs usng undscl0scd nI0rmI0n. 0nly nI0rmI0n IhI rc clssIcd
by Ihc lw my lwIully bc wIhhcld.
A lsIcd c0mpny musI, wIh0uI dcly, n0IIy Ihc rcgulI0ry nI0rmI0n
dcprImcnI 0I Ihc SI0ck Exchngc 0I ny m|0r ncw dcvcl0pmcnI whch my
lcd I0 subsInIl chngcs n Ihc prccs 0I lsIcd sccurIcs, Ihc c0mpny's
Inncl p0sI0n, Ihc pcrI0rmncc 0I Is busncss 0r Ihc c0mpny's
cxpccII0ns s I0 Is pcrI0rmncc s0 IhI n nvcsI0r w0uld n0I 0uIpcrI0rm
Ihc mrkcI, Ihcrcby rcsulIng n ncIIccnI cpIl mrkcI.
Thc rghIs 0I Ihc shrch0ldcrs, cc0rdng I0 Ihc lw 0I c0nIrcI, sh0uld bc
pr0IccIcd. Shrch0ldcrs, sh0uld kn0w ppr0prIc mcns 0I rcdrcss I0r Ihc
nIrngcmcnI 0I Ihcr rghIs.
C0mpncs sh0uld cmp0wcr Ihcr shrch0ldcrs by c0mmuncIng cIIccIvcly
wIh nd gvng Ihcm rcdy cccss I0 blnccd nd undcrsIndblc
nI0rmI0n, Ircc 0I Icchncl |rg0ns. C0mpncs sh0uld gvc pr0pcr n0Iccs
0I mccIngs nd rcqucsI Ihc cxIcrnl udI0r I0 IIcnd Ihc nnul gcncrl
mccIng nd mkc hmsclI vlblc I0 nswcr qucsI0ns b0uI Ihc c0nducI
0I Ihc udI nd Ihc prcprI0n nd c0nIcnI 0I Ihc udI0r's rcp0rI.
Thc c0mpny's sysIcm sh0uld bc dcsgncd I0 dcnIIy, sscss, m0nI0r nd
mngc rsk nd nI0rm nvcsI0rs 0I mIcrl chngcs n Ihc rsk pr0Ilc. Thc
32
sysIcm dcsgncd wll cnhncc Ihc cnvr0nmcnI I0r dcnIIyng nd
cpIlsng 0n 0pp0rIunIcs IhI w0uld crcIc vluc.
H0wcvcr, Ihc bcsI prcIcc 0I rsk mngcmcnI s chcvcd by csIblshng
p0lccs 0n rsk 0vcrsghI. Thc MngcmcnI (Ihc ChcI ExccuIvc 0IIccr 0r
ChcI Fnncl 0IIccr, I0r cxmplc) sh0uld wrIc I0 Ihc b0rd sIIcmcnI
IhI Ihc c0mpny's Inncl rcp0rI prcscnI Iruc nd Ir vcw, nd IhI Ihc
0rgnsI0n s bcng run 0n s0und sysIcm 0I rsk mngcmcnI, nIcrnl
c0mplncc nd c0nIr0l.
!n cnsurng g00d C0rp0rIc 00vcrnncc, Ihc pcrI0rmncc 0I Ihc 0rd, Is
c0mmIIccs, ndvdul 0rccI0rs, nd 'kcy' cxccuIvc mcmbcrs sh0uld bc
rcvcwcd rcgulrly nd Ihc pr0ccss I0r pcrI0rmncc cvluI0n dscl0scd.
Ths mcns IhI Ihc 0rccI0rs nd mngcmcnI sh0uld hvc cccss I0
c0nInung cducI0n I0 updIc nd cnhncc Ihcr skll nd kn0wlcdgc nccdcd
I0 dschrgc rcsp0nsblIcs cIIccIvcly.
Thc mngcmcnI's cIvIcs sh0uld ls0 bc cvluIcd undcr 0b|ccIvc
sIndrds, ncludng busncss rcsulIs, chcvcmcnI 0I busncss sIrIcgy, g0ls
nd 0Ihcrs. Thc cvluI0n rcsulIs sh0uld bc uscd s bss I0r dcIcrmnng
rcmuncrI0n nd rcpp0nImcnI 0I mngcmcnI.
C0mpny's c0rp0rIc g0vcrnncc gudclncs sh0uld c0nIn rcmuncrI0n
p0lcy nd pr0ccdurcs IhI w0uld mnIn IlcnIcd nd m0IvIcd 0rccI0rs
nd cmpl0yccs s0 s I0 cnc0urgc cnhnccd pcrI0rmncc 0I Ihc c0mpny.
Thc p0lccs sh0uld sh0w clcrly Ihc rclI0nshp bcIwccn pcrI0rmncc nd
rcmuncrI0n nd sh0uld bc dscl0scd I0 Ihc shrch0ldcrs n I0rml nd
IrnsprcnI mcIh0d. H0wcvcr, Ihc 0rd sh0uld csIblsh rcmuncrI0n
c0mmIIcc, c0nssIng 0I Ihc m|0rIy 0I ndcpcndcnI 0rccI0rs, wIh I0rml
chrIcr I0 rcvcw, rcc0mmcnd 0n cxccuIvc rcmuncrI0n nd nccnIvc
p0lccs, scn0r mngcmcnI rcmuncrI0n, Ihc c0mpny's rccruImcnI,
rcIcnI0n nd IcrmnI0n p0lccs cIc.
!n rcmuncrIng Ihc mngcmcnI, Ihc lmI sh0uld bc wIhn Ihc m0unI
ppr0vcd by Ihc shrch0ldcrs nd Ihc c0mpny's Inncl c0ndI0n.
Sncc c0mpncs hvc numbcr 0I lcgl nd 0Ihcr 0blgI0ns I0 b0Ih
shrch0ldcrs nd sIkch0ldcrs, such s cmpl0yccs, clcnIs / cusI0mcrs,
dcbcnIurc h0ldcrs nd Ihc c0mmunIy s wh0lc, c0dc 0I c0nducI sh0uld
33
bc csIblshcd nd dscl0scd I0 ddrcss ssucs such s 'Ir Irdng' nd
'dclng', c0nIlcIs 0I nIcrcsI, rcsp0nsblIcs I0 Ihc c0mmunIy nd
ndvduls, c0rp0rIc 0pp0rIunIcs, c0mplncc wIh lw nd cnc0urgc
Ihc rcp0rIng 0n ny llcgl 0r uncIhcl bchv0ur.
T0 crcIc wcll g0vcrncd C0rp0rI0n, c0mpncs sh0uld sIrI rcIhnk 0n
Ihc mpcI 0I 0rccI0rs' r0lc. Thc 0rd sh0uld bc pr0cIvc nd cIIccIvc n
p0lcy mkng pr0ccsscs nd cnsurc IhI Ihc I0ll0wng c0rp0rIc g0vcrnncc
rcI0rms rc csIblshcd:
() 0rd mcmbcrs sh0uld bc cxpcrIs. 0rccI0rs musI bc kn0wlcdgcblc
n Ihc c0mplcxIcs 0I Ihc c0mpny nd Is ndusIry, 0I Inncc,
rclcvnI lws nd rcgulI0ns I0 bc blc I0 prIcpIc cIIccIvcly n
dccs0nmkng,
(b) 0rd mccIng pr0ccdurcs sh0uld I0cus 0n dcbIng ncw dccs0ns,
sIrIcgcs nd p0lccs n0I |usI 0n rcvcwng psI pcrI0rmncc. Ths
wll cnblc Ihc 0rd I0 prIcpIc n Ihc l0ng rngc plnnng pr0ccss
rghI Ir0m Ihc 0uIscI,
(c) 0rd c0mmIIccs: Ihc AudI, C0mpcnsI0n nd N0mnI0ns sh0uld
bc sIrcngIhcncd, nd
(d) F0rml nd pcr0dc cvluI0n 0I Ihc ChcI ExccuIvc 0IIccr nd Ihc
0rccI0rs sh0uld bcc0mc n nnul cvcnI. Thc pr0ccss sh0uld nv0lvc
dl0guc wIh Ihc ChcI ExccuIvc b0uI hs 0r hcr sIrcngIhs,
wckncsscs, 0b|ccIvcs, pcrs0nl plns nd 0I c0ursc, pcrI0rmncc.
Thc Icrm mcns Ihc sysIcm by whch c0mpncs rc
drccIcd nd mngcd n Ihc bcsI nIcrcsI 0I Ihc 0wncrs nd nvcsI0rs. !I
rcIcrs I0 Ihc r0lcs nd rcsp0nsblIcs I0 Ihc 0rd 0I 0rccI0rs, ExccuIvc
nd n0nExccuIvc mcmbcrs, nd shrch0ldcrs' rghIs.
C0rp0rIc 00vcrnncc s Icrm c0vcrs ll Ihc gcncrl mcchnsms by whch
Ihc mngcmcnI Icm s lcd I0 cI n Ihc bcsI nIcrcsI 0I Ihc cnIIy's 0wncrs.
A pcrIccI sysIcm 0I C0rp0rIc 00vcrnncc w0uld gvc mngcmcnI ll Ihc
rghI nccnIvcs I0 mkc vluc mxmsng nvcsImcnIs nd Inncng
dccs0ns. Ths chpIcr dscusscd Ihc prncplcs 0I C0rp0rIc 00vcrnncc.
SpccIclly, Ihc r0lcs 0I Ihc 0rd, sIrucIurc 0I Ihc 0rd, ssucs 0I cIhcs
nd nIcgrIy, dscl0surc rcqurcmcnIs, pr0IccI0n 0I shrch0ldcrs' rghIs, rsk
mngcmcnI ppr0ch, pcrI0rmncc cvluI0n pr0ccss nd Ircqucncy,
rcmuncrI0n nd lcgImIc nIcrcsIs 0I sIkch0ldcrs wcrc dscusscd.
34
!n summry, I cn bc dcduccd IhI pr0pcr mngcmcnI 0I c0mpncs s
vcry mp0rInI I0 cnblc n 0rgnsI0n I0 buld vrlc busncss, clcvIc
0rd's c0mpcIcncc nd cnc0urgc Icmw0rk n 0rdcr I0 rclsc mmcnsc
bcncIIs I0 Ihc shrch0ldcrs.
. whch 0NE 0I Ihc I0ll0wng s N0T prncplc 0I c0rp0rIc g0vcrnncc!
A Pr0m0I0n 0I cIhcl nd rcsp0nsblc dccs0n mkng pr0ccss.
0vng Ihc b0rd n 0vcrrddng p0wcr.
C SIrucIurng Ihc b0rd I0 dd vluc.
0 !nIcgrIy 0I Inncl rcp0rIng.
E 0sply 0I snccrIy 0I purp0sc n Ihc mngcmcnI 0I rsk.
2. Thc clrIcI0n 0I r0lcs bcIwccn Ihc b0rd 0I drccI0rs nd Icm 0I
mngcmcnI wll cnsurc Ihc I0ll0wng EXCEPT:
A A blncc 0I uIh0rIy s0 IhI n0 snglc ndvdul hs unIcIIcrcd
p0wcr.
Hclps Ihc b0rd I0 pr0vdc sIrIcgc gudncc I0r Ihc c0mpny.
C PuI n plcc pr0ccsscs I0r mnInng nIcgrIy 0I Ihc c0mpny.
0 0vcs Ihc 0rd 0I drccI0r Ihc p0wcr I0 dcl wIh dcIcrrcnI
mngcmcnI.
E 0vcrsccng c0rp0rIc sIrIcgy nd pcrI0rmncc.
3. Thc IuncI0ns 0I Ihc 0rd 0I 0rccI0rs ncludc Ihc I0ll0wng EXCEPT:
A M0nI0rng Ihc cIIccIvcncss 0I g0vcrnncc prcIccs.
Appr0vng busncss plns nd budgcIs.
C Ensurng IhI Ihcr nIcrcsIs rc pr0IccIcd.
0 Rcplcng Ihc mngcmcnI nd rcvcwng rcmuncrI0n.
E 0vcrsccng Ihc pr0ccss 0I nI0rmI0n dscl0surc.
4. whch 0NE 0I Ihc I0ll0wng s n0I n csscncc 0I c0rp0rIc g0vcrnncc n
Irm!
A 0vcs Ihc m|0rIy shrch0ldcrs Ihc rghI I0 rcm0vc drccI0rs
IhI Ils I0 py dvdcnd.
Pr0m0Ics culIurc n whch drccI0rs wll gvc c0nccrn I0 Ihc cIhcl
pursuI 0I shrch0ldcrs nIcrcsI.
C PrcvcnIs cxpl0II0n 0I nvcsI0rs by mngcrs.
0 Hclps n mxmzng c0rp0rIc vluc by cnhncng Irnsprcncy
nd cIIccncy 0I c0mpny I0r Ihc IuIurc.
E PrcvcnIs IrudulcnI prcIccs Ihr0ugh Ihc mcchnsms dcsgncd
by Ihc 0rd.
35
5. !n 0rdcr I0 crcIc wcll g0vcrncd C0rp0rI0n, whch 0NE 0I Ihc I0ll0wng
s n0I rcqurcd!
A 0rd sh0uld c0nssI 0I mcmbcrs hvng cxpcrcncc n Ihc
ndusIry n whch Ihc c0mpny 0pcrIcs.
M|0rIy 0I Ihc 0rd mcmbcrs musI hvc Ihc hghcsI numbcr 0I
shrcs.
C Thcrc sh0uld bc I0rml nd pcr0dc cvluI0n n Ihc c0mpny
0 0rd c0mmIIcc sh0uld bc sIrcngIhcncd.
E 0rd mccIng pr0ccdurcs sh0uld I0cus 0n dcbIng ncw
sIrIcgcs nd p0lccs.
. Thc c0mbnI0n 0I pr0ccsscs, sIrucIurcs nd rclI0nshps Ihr0ugh whch
busncss c0rp0rI0ns rc drccIcd nd c0nIr0llcd s rcIcrrcd I0 s
_______________
2. SIIc 0nc s0cl rcsp0nsblIy 0I c0mpny Ir0m Ihc vcwp0nI 0I Ihc
c0mmunIy n whch I 0pcrIcs.
3. whI s Ihc nmc gvcn I0 IhI lIcrnIvc 0b|ccIvc I0 shrch0ldcrs
wclIh mxmsI0n whch IrcIs ll sIkch0ldcrs I pr!
4. 0vc 0nc bcncII 0I g00d c0rp0rIc g0vcrnncc Ir0m Ihc p0nI 0I vcw 0I
Ihc cpIl mrkcIs
5. SIIc 0NE grcIcsI IhrcI I0 c0rp0rIc g0vcrnncc n Ihc Ngcrn c0rp0rIc
ndusIry.
37
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ UndcrsInd Inncl mrkcIs n gcncrl,
+ SIIc Ihc m|0r Iypcs 0I Inncl mrkcIs,
+ McnI0n Ihc nsIrumcnIs n cch 0I Ihc mrkcIs,
+ Expln Ihc chrcIcrsIcs 0I m0ncy mrkcI nsIrumcnIs,
+ ApprccIc Ihc dvnIgcs nd dsdvnIgcs 0I m0ncy mrkcI nsIrumcnIs,
+ Expln Ihc chrcIcrsIcs 0I g0vcrnmcnI qu0Icd sccurIcs,
+ Kn0w Ihc dvnIgcs nd dsdvnIgcs 0I g0vcrnmcnI qu0Icd sccurIcs,
+ McnI0n Ihc prIcpnIs 0I Ihc Inncl mrkcIs nd undcrsInd Ihc IuncI0ns
0I Ihc prIcpnIs 0I Ihc Inncl mrkcIs, nd
+ UndcrsInd Ihc mplcI0ns 0I Ihc Inncl mrkcI cIvIcs.
Fnncl mrkcIs rc mrkcIs whcrc ndvduls nd 0rgnsI0ns rsc
cpIl Ihr0ugh slc 0I sccurIcs nd nvcsI Ihcr surplus Iunds Ihr0ugh
purchsc 0I sccurIcs. Fnncl mrkcIs ls0 ncludc Ihc nsIIuI0ns Ihr0ugh
whch Ihcsc IrnscI0ns rc crrcd 0uI.
Thc sccurIcs b0ughI nd s0ld rc kn0wn s Inncl sscIs. Thcrc rc Iw0
br0d cIcg0rcs 0I Inncl mrkcIs:
() Thc m0ncy mrkcI, nd
(b) Thc cpIl mrkcIs.
Thc m0ncy mrkcI s mrkcI I0r sh0rIIcrm sccurIcs, IhI s, sccurIcs
wIh Icnurc 0I 0nc ycr 0r lcss. !nsIrumcnIs Irdcd n Ihc m0ncy mrkcI rc
38
chrcIcrscd by l0w lcvcl 0I rcIurn, hgh dcgrcc 0I sIcIy, IhI s, l0w lcvcl
0I rsk, hgh dcgrcc 0I lqudIy nd g00d nsIIuI0nl sIrucIurc. Exmplcs 0I
nsIrumcnIs Irdcd n Ihc Ngcrn m0ncy mrkcI ncludc, Ircsury blls,
CcnIrl nk 0I Ngcr (CN) ccrIIcIcs, c0mmcrcl bnk dcp0sIs,
ccrIIcIc 0I dcp0sI (ncg0Iblc nd n0nncg0Iblc), bnkcrs cccpInccs
(As) nd C0mmcrcl Ppcrs (CPs).
Thc chrcIcrsIcs 0I cch 0I Ihcsc nsIrumcnIs rc dscusscd s I0ll0ws:
Thc I0ll0wng rc Ihc m|0r m0ncy mrkcI nsIrumcnIs:
Thcsc rc sh0rIIcrm sccurIcs ssucd by Ihc CcnIrl nk 0I
Ngcr (CN) 0n bchlI 0I Ihc Fcdcrl 00vcrnmcnI 0I Ngcr
(F0N). Asdc Ir0m csh nvcsImcnIs, Ihcy rc Ihc m0sI lqud
nd Ihc sIcsI 0I ll nvcsImcnIs s Ihcy rc bckcd by Ihc
Fcdcrl 00vcrnmcnI. Thcy rc IhcrcI0rc rcgrdcd by Inncl
mngcrs s rskIrcc sccurIcs.
Trcsury blls rc ssucd n dcn0mnI0ns 0I N,000 nd rcc
s0ld 0n ucI0n bss. Thcy hvc 9 dys, 82 dys nd 3b5
dys mIurIy nd rc s0ld I dsc0unI I0 Ihcr Icc 0r pr
vluc.
Thcsc rc ssucd ls0 by Ihc CN 0n bchlI 0I Ihc Fcdcrl
00vcrnmcnI I0 brdgc Ihc Inncng gp bcIwccn Ircsury blls
nd l0ngIcrm Fcdcrl 00vcrnmcnI b0nds. Thcy rc s0ld I0r
mIurIcs 0I 80 dys nd 3b4 dys.
Thcsc rc usully rcIcrrcd I0 s svngs cc0unIs. Thcy rc Ihc
smplcsI I0rms 0I nvcsImcnI. Thc mnmum rcqurcd m0unI
vrcs Ir0m bnk I0 bnk. Thcrc s n0 mxmum. 0cp0sI
cc0unIs n0rmlly py sIIcd rIc 0I nIcrcsI whch ls0 vrcs
m0ng bnks. wIhdrwls cn Ikc plcc wIh0uI pcnlIy cvcn
whcn Ihcrc s n0 n0Icc. H0wcvcr, mnmum blncc whch
vrcs m0ng bnks musI bc mnIncd I0 kccp Ihc cc0unI
lvc.
39
Thcsc rc ls0 kn0wn s Ixcd dcp0sIs. A ccrIIcIc 0I dcp0sI
s rcccpI ssucd by bnk I0 dcp0sI0r wh0 puIs n n
grccd sum 0I m0ncy I0r Ixcd pcr0d 0I Imc rngng Ir0m
0nc m0nIh I0 ny pcr0d s grccd wIh Ihc bnk. nks usully
py Ixcd rIc 0I nIcrcsI IhI s hghcr Ihn IhI 0n Ihc rcgulr
svngs cc0unI nd IhI ncrcscs wIh Ihc pcr0d 0I dcp0sI.
y ssung Ihc ccrIIcIc, bnk undcrIkcs I0 py Ihc m0unI
0I m0ncy dcp0sIcd (wIh nIcrcsI) I0 Ihc h0ldcr 0I Ihc rcccpI
0n Ihc spccIcd dIc.
Thcrc rc ncg0Iblc nd n0nncg0Iblc ccrIIcIcs 0I dcp0sI.
Ncg0Iblc ccrIIcIcs ssucd by CN cn bc s0ld bcI0rc
mIurIy 0n Ihc scc0ndry mrkcI 0r dsc0unIcd I CN. N0n
ncg0Iblc ccrIIcIcs rc hcld I0 mIurIy. TcrmnI0n 0I Ihc
dcp0sI bcI0rc mIurIy usully IIrcIs pcnlIy.
A bnkcr's cccpIncc s ncg0Iblc Imc drII bcl0ngng I0
clss 0I nsIrumcnIs kn0wn s bll 0I cxchngc. A bll s
usully drwn 0n bnk nd pr0pcrly sgncd by Ihc drwcr. !I
s mdc pyblc I0 Ihc drwcr hmsclI 0r I0 nmcd Ihrd
prIy. !I nd whcn Ihc drwcc bnk sgns Ihc bll cr0ss by
wrIng cccpIcd, Ihc bll bcc0mcs bnkcr's cccpIncc.
nkcrs cccpInccs hvc Ihrcc prIcs - drwcr, drwcc, nd
pycc - nd mIurIy pcr0ds rngng Ir0m 30 dys I0 80 dys.
Thcrc s c0nsdcrblc sIcIy nd lqudIy buI n0I s hgh s
Ih0sc 0n Ircsury blls. Thcr rIcs rc h0wcvcr, hghcr Ihn
Ih0sc 0I Ircsury blls. nkcr's cccpIncc s I0rm 0I
gurnIcc by Ihc bnk nd cn bc uscd I0 Inncc d0mcsIc 0r
nIcrnI0nl Irdc. nkcrs cccpInccs rc b0ughI nd s0ld
0n dsc0unI bss.
Thcsc rc sh0rIIcrm ncg0Iblc unsccurcd pr0mss0ry n0Ics
s0ld by bg nd rcpuIblc c0mpncs m0sIly Inncc c0mpncs
I0 rsc m0ncy n Ihc m0ncy mrkcI. C0mmcrcl ppcrs hvc
Iw0 prIcs - pr0ms0r nd Ihc pr0msscc. A bnk 0nly c0mcs
n s n gcnI 0I cIhcr prIy 0r b0Ih prIcs.
40
Thc rIcs 0n c0mmcrcl ppcrs rc hghcr Ihn Ih0sc 0n
bnkcrs cccpInccs nd Ihcr rsk s ls0 hghcr. C0mmcrcl
ppcrs rc ls0 Irdcd 0n dsc0unI bss.
M0ncy mrkcI nsIrumcnIs hvc c0mm0n dvnIgcs nd
dsdvnIgcs s Ihcy ll bcl0ng I0 Ihc smc snglc mrkcI.
() Thcrc rc rcsIrcI0ns 0n wIhdrwls nd
nsIrumcnIs Irdcd cn bc dsc0unIcd 0n Ihc scc0ndry mrkcI
0r I Ihc dsc0unI 'wnd0w' 0I Ihc CN.
(b) Thcrc s sIcIy 0I nc0mc nd cpIl s ssucrs 0I
sccurIcs rc g0vcrnmcnI, bnks nd rcpuIblc bg busncss
0rgnsI0ns.
(c) Ihc 0rgnsI0nl rrngcmcnIs,
n Icrms 0I mrkcI nd Ihc prIcpIng nsIIuI0ns, rc g00d,
() rcIurn s l0w bccusc Ihc rsk s ls0 l0w.
(b) b0Ih nc0mc nd cpIl vlucs c0uld bc cr0dcd by
nIlI0n. Thcrc s IxIy 0I nc0mc nd cpIl s 0nly rcpd I
Ihc cnd 0I Ihc nsIrumcnI Icn0r.
(c) Ihcrc s zcr0 gr0wIh I0r b0Ih Ihc cpIl nvcsIcd nd
nc0mc sIrcm 0vcr Ihc nvcsImcnI pcr0d.
Thc cpIl mrkcIs rc Ihc mrkcIs I0r nIcrmcdIc nd l0ngIcrm
sccurIcs, IhI s, sccurIcs IhI hvc m0rc Ihn 0nc ycr 0I mIurIy sy
Ihrcc ycrs, Ivc ycrs, Icn ycrs nd IwcnIyIvc ycrs. Thc cpIl mrkcIs
c0mprsc Ihc b0nd mrkcI nd sI0cks (shrcs) mrkcI. Thc b0nd mrkcI s
Ihc mrkcI whcrc lcndng nd b0rr0wng 0I cpIl (cxchngc 0I sccurIcs
nd csh) Ikc plcc whlc Ihc sI0cks mrkcI rc Ihc mrkcI whcrc shrcs
rc b0ughI nd s0ld. Rcgrdlcss 0I whcIhcr I s b0nd mrkcI 0r sI0cks
mrkcI, Ihcrc s ls0 dvs0n nI0 prmry mrkcI nd scc0ndry mrkcI.
Thc prmry mrkcI s mrkcI I0r ncw ssucs whlc Ihc scc0ndry mrkcI
s mrkcI I0r cxsIng sccurIcs.
4
Thc bckb0nc 0I Ihc scc0ndry mrkcI s Ihc sI0ck cxchngc. !n Ngcr, Ihc
cIvIcs 0I Ihc sI0ckbr0kcrs (Ihc kcy 0pcrI0rs 0I Ihc sI0ck mrkcI) rc bcng
rcgulIcd by Ihc Ngcrn SI0ck Exchngc (NSE) 0r smply Thc Exchngc.
!I sh0uld bc n0Icd IhI, unlkc Ihc m0ncy mrkcI (wIh Is unIyng nIcrcsI
rIc), Ihc cpIl mrkcIs c0mprsng Ihc prmry nd scc0ndry mrkcIs
hs Is 0wn dsIncI nd unquc chrcIcrsIcs, hcncc Ihc dcscrpI0n 'cpIl
mrkcIs' (nd n0I cpIl mrkcI).
Thcsc rc sccurIcs ssucd by Ihc g0vcrnmcnI I ny 0I Ihc Ihrcc lcvcls
Icdcrl, sIIc 0r l0cl. Thcy rc gcncrlly l0ngIcrm nd Ihcy cn bc
qu0Icd 0r unqu0Icd. u0II0n hcrc mcns lsIcd nd Irdcd 0n Ihc
Il00r 0I Thc Ngcrn SI0ck Exchngc. AI prcscnI Ihcrc rc Ihc ncIvc
Fcdcrl 00vcrnmcnI 0cvcl0pmcnI sI0cks, Ihc Fcdcrl 00vcrnmcnI
0nds nd SIIc Rcvcnuc 0nds.
H0wcvcr, n vcw 0I Ihc prIculr nIcrcsI nvcsI0rs plcc 0n qu0Icd
g0vcrnmcnI sccurIcs, subscqucnI dscuss0ns wll bc dcv0Icd I0 I.
Thc chrcIcrsIcs 0I g0vcrnmcnI sccurIcs qu0Icd 0n Ihc
Ngcrn SI0ck Exchngc rc dscusscd undcr Ihc I0ll0wng
hcdngs:
()
Thcsc rc usully n unIs 0I N000 nd I s0 much
pcrccnI. Thc N000 rcprcscnIs Ihc n0mnl 0r pr vluc
0I Ihc sccurIy.
(b)
Ech g0vcrnmcnI sccurIy usully hs rIc 0I nIcrcsI
IIchcd I0 I I Ihc Imc 0I ssuncc. Ths s rcIcrrcd I0
s Ihc n0mnl rIc 0I nIcrcsI (ls0 cllcd c0up0n rIc).
Ths c0up0n rIc my bc Ixcd 0r vrblc. !I I s Ixcd, I
mcns Ihc ssucr gurnIccs Ixcd m0unI 0I nIcrcsI
cvcry ycr pyblc usully, Iwcc ycr. !I I s vrblc,
I mcns Ihc nIcrcsI rIc wll bc lnkcd I0 m0vcmcnI n
prIculr mrkcI ndcx such s Ihc CN m0ncIry
42
p0lcy rIc (MPR) buI wIh Il00r rIc nd cclng rIc.
F0r cxmplc, I sIIc rcvcnuc b0nd s ssucd I
c0up0n rIc 0I 4 b0vc Ihc MPR 0I sy 0 (wIh
mxmum rIc 0I 8), Ihc Il00r rIc wll bc 4 nd
Ihc cclng rIc wll bc 8 . !nvcsI0rs n Ihs b0nd rc
pr0IccIcd gnsI nIcrcsI rIc rsk lIh0ugh n0I gnsI
nIlI0n rsk I nIcrcsI rIcs d0 n0I d|usI Iully I0r
cxpccIcd nIlI0n.
(c)
Ths s Ihc mrkcI rIc 0I nIcrcsI nd Ihc drvng I0rcc
I0r Ihc mrkcI prcc (rcl vluc) 0I ll qu0Icd Ixcd -
nIcrcsI g0vcrnmcnI sccurIcs. Thc hghcr Ihc ycld 0r
mrkcI nIcrcsI rIc Ihc l0wcr Ihc vluc 0I qu0Icd Ixcd
nIcrcsI b0nd nd vcc vcrs. F0r cxmplc, I nvcsI0rs
Iccl IhI Ir rIc 0I nIcrcsI I0r nvcsIng n0w n l0ng
Icrm g0vcrnmcnI sccurIcs s 20, prcv0usly ssucd
SIIc Rcvcnuc 0nd wIh Ixcd c0up0n 0I 0 nd pr
vluc 0I 000, wll n0w bc w0rIh N500. Thus,
pr0spccIvc nvcsI0r n Ihs prIculr b0nd wll n0w py
N500 pcr unI.
(d)
RcIurn c0mprscs b0Ih nIcrcsI cIully rcccvcd durng
Ihc pcr0d Ihc sccurIy s hcld plus cpIl pprccI0n.
!I s mIhcmIclly cxprcsscd s:
( )

P
P P !
R
0
0
+
=
P

- P
0
s Ihc cpIl pprccI0n (0r dcprccI0n)
cIhcr 0n dsp0sl 0r 0n rcdcmpI0n.
Ths I0rmul ssumcs 0nc ycr h0ldng pcr0d 0nly.
43
(c)
RcpymcnI 0I Ihc n0mnl m0unI b0rr0wcd by Ihc
g0vcrnmcnI wll bc mdc I spccIcd IuIurc dIc (sy
205) 0r wIhn spccIcd IuIurc pcr0d (205209).
whcrc g0vcrnmcnI b0nds rc undIcd, Ihcsc b0nds wll
pr0bbly ncvcr bc rcpd s Ihc g0vcrnmcnI hs n0
0blgI0n I0 rcpy by spccIc dIc nd rcpymcnI
wll dcpcnd 0n shrply Illng nIcrcsI rIcs whcn ncw
ssucs c0uld bc mdc I l0wcr c0up0n 0n Ihc smc
n0mnl vluc.
RcpymcnI 0I sIIc b0nd s usully bscd 0n Ihc ssuc
0I !rrcv0cblc SIndng PymcnI 0rdcr (!SP0) whch
scrvcs s IrsI chrgc up0n (nd pyblc 0uI 0I) Ihc
sIIc's sIIuI0ry ll0cI0n.
00vcrnmcnI qu0Icd sccurIcs hvc Ihc I0ll0wng
dvnIgcs nd dsdvnIgcs.
()
CpIl s usully sccurcd s I s bckcd by Ihc
Fcdcrl 0r SIIc g0vcrnmcnI s Ihc csc my bc.
Als0, s b0nd ppr0chcs Is rcpymcnI dIc,
Ihc mrkcI vluc wll n0I IlucIuIc s0 much Ir0m
Is pr vluc.
(b)
!nc0mc s ls0 sccurcd s dcIulI n pyng
nIcrcsI s n0I cxpccIcd Ir0m g0vcrnmcnI.
(c)
cng qu0Icd sccurIy, Ihcrc s mrkcI whcrc
dsp0sl cn Ikc plcc I Ihcrc s nccd I0r csh.
44
()
cng qu0Icd sccurIy whch hs prcc IhI
c0uld IlucIuIc, Ihcrc s s0mc clcmcnI 0I rsk -
Ihc nIcrcsI rIc rsk.
(b)
0Ih nc0mc sIrcms nd cpIl vlucs my bc
cr0dcd by nIlI0n - nIlI0n rsk.
Thcsc rc ls0 sccurIcs 0I Ihc cpIl mrkcI. Thc bsc 0ncs rc
dcbcnIurcs (l0n sI0ck), prcIcrcncc shrcs nd 0rdnry (cquIy)
shrcs Thcr ndvdul chrcIcrsIcs wll bc dscusscd lIcr n
n0Ihcr chpIcr c0vcrng S0urccs 0I l0ngIcrm cpIl.
Thc prIcpnIs n Ihc cpIl mrkcIs rc Ih0sc wh0 rc cIvcly nv0lvcd
n Ihc purchsc nd slc 0I sI0cks nd shrcs nd Ih0sc nsIIuI0ns IhI rc
nv0lvcd s rcgulI0ry uIh0rIcs.
Thcy ncludc n Ihc mn:
() !ndvduls nd c0mpncs,
(b) nks,
(c) N0nbnk Inncl nsIIuI0ns,
(d) !ssung h0uscs,
(c) SI0ckbr0kcrs,
(I) Thc Ngcrn SI0ck Exchngc (NSE),
(g) SccurIcs nd Exchngc C0mmss0n (SEC), nd
(h) CcnIrl nk 0I Ngcr (CN).
c0mpncs, bnks nd n0nbnk Inncl nsIIuI0ns
(nsurncc c0mpncs, unI IrusIs, Inncc h0uscs) prIcpIc n Ihc Inncl
45
mrkcIs cIhcr s buycrs 0r s scllcrs 0I sccurIcs.
cI s Inncl nIcrmcdrcs n:
() Thc prcng 0I ncw ssucs (l0ng wIh Ihc ssung c0mpny),
(b) UndcrwrIng 0I sccurIcs,
(c) rngng ncw ssucs I0 Ihc mrkcI,
(d) 0cIcrmnng Ihc Imng 0I ncw ssucs (sub|ccI I0 Ihc ppr0vl 0I SEC).
(c) PcrI0rmng spcclsI cIvIcs, nd
(I) Pr0vdng Inncl dvs0ry scrvccs.
cI s gcnIs 0n bchlI 0I buycrs nd scllcrs 0I sccurIcs 0n
Ihc sI0ck mrkcI nd c0llccI c0mmss0n cllcd br0kcrgc. !nvcsI0rs cn
0nly buy 0r scll Ihr0ugh sI0ckbr0kcrs wh0 rc lccnscd I0 rcprcscnI Ihcm nd
Irdc 0n Ihc SI0ck Exchngcs. SI0ckbr0kcrs ls0 pr0vdc pr0Icss0nl dvcc
0n Ihc sclccI0n nd mngcmcnI 0I nvcsImcnIs nd sssI pr0|ccI sp0ns0rs
I0 rsc m0ncy 0n Ihc cpIl mrkcI.
() Pr0vdcs Ihc plII0rm I0r buyng nd scllng 0I cxsIng sccurIcs,
(b) Pr0vdcs lqudIy I0r nvcsI0rs,
(c) RcgulIcs Ihc cIvIcs 0I Ihc sI0ck br0kcrs,
(d) Enc0urgcs IrnscI0ns n Ihc ncw ssuc mrkcI., nd
(c) Hclps I0 sprcd pr0m0Icrs rsks.
() RcgsIcrs ll sccurIcs I0 bc 0IIcrcd I0r slc I0, 0r I0r subscrpI0n by,
Ihc publc,
(b) Appr0vcs Imng 0I ncw ssucs,
(c) MnIns survcllncc 0vcr dclngs n sccurIcs,
(d) RcgsIcrs ll sI0ck cxchngcs ncludng Ihcr brnchcs nd cpIl
mrkcI 0pcrI0rs, nd
4b
(c) Pr0IccIs Ihc sccurIcs mrkcI gnsI ny mnpulI0ns ncludng
nsdcr Irdng.
() 0pcrIcs mnly n Ihc m0ncy mrkcI,
(b) Mngcs Ihc nIcrcsI rIc,
(c) SIcgurds Ihc nI0n's cc0n0my gnsI dcprccI0n 0I Ihc vluc 0I
Ihc nr, nd
(d) PuIs nIlI0n rIc I I0lcrblc lcvcl.
!n crryng 0uI hs IuncI0ns 0I ll0cI0n, nd s0urcng I0r Iunds, Ihc Inncl
mngcr s ncI uscr 0I cpIl rcs0urccs. Hc cnIcrs Ihc m0ncy mrkcI I0
nvcsI Iunds Icmp0rrly surplus I0 Ihc c0mpny's rcqurcmcnIs. Hc g0cs I0
Ihc cpIl mrkcIs I0 rsc Iunds. !n d0ng Ihs, hc hs I0 dcsgn sIrIcgcs
I0r ch00sng Ihc bcsI nd chcpcsI s0urcc(s) 0I Iunds. Thc rIc 0I rcIurn hc
pys IIccIs Ihc ch0cc nd cccpIblIy 0I Ihc c0mpny's pr0|ccIs. As crlcr
dscusscd, hc sh0uld bc nIcrcsIcd n Ihc prcc puI 0n Ihc c0mpny's shrc
0n Ihc sI0ck mrkcI s Ihs my ulImIcly IIccI Ihc sccurIy 0I I0p
mngcmcnI (ncludng hmsclI) vsvs Ihcr cm0lumcnIs nd Ihcr
c0nInucd sIy 0n Ihc |0b.
Fnncl mrkcIs rc mrkcIs whcrc Inncl sscIs (sccurIcs) rc Irdcd.
Thcy c0mprsc m0ncy mrkcI nd cpIl mrkcIs. M0ncy mrkcI s mrkcI
I0r sh0rIIcrm sccurIcs whlc cpIl mrkcIs rc mrkcIs I0r nIcrmcdIc
nd l0ngIcrm sccurIcs. M0ncy mrkcI nsIrumcnIs rc Ihc sccurIcs Irdcd
n Ihs mrkcI nd Ihcy ncludc Ircsury blls, c0mmcrcl bnks' dcp0sIs,
Ixcd dcp0sIs, bnkcrs' cccpInccs nd c0mmcrcl ppcrs.
CpIl mrkcIs nsIrumcnIs c0mprsc, m0ng 0Ihcrs, Fcdcrl 00vcrnmcnI
b0nds, sIIc rcvcnuc b0nds, dcbcnIurcs (c0rp0rIc l0n sI0cks) PrcIcrcnccs
shrcs nd 0rdnry shrcs.
M0ncy mrkcI nsIrumcnIs hvc c0mm0n chrcIcrsIcs whch b0rdcr 0n
l0w rsk, l0w rcIurn, hgh lqudIy nd g00d nsIIuI0nl sIrucIurc. CpIl
mrkcIs nsIrumcnIs hvc dIIcrcnI nd unquc chrcIcrsIcs.
47
PrIcpI0n n Ihc Inncl mrkcIs my bc cIvc (s buycrs nd scllcrs),
nIcrmcdIng (s gcnIs) 0r rcgulI0ry. PrIcpnIs rc ndvduls,
c0mpncs, bnks, n0nbnk Inncl nsIIuI0ns, ssung h0uscs, sI0ck
br0kcrs, urcux dc Chngcs, Ngcrn SI0ck Exchngc, SccurIcs nd
Exchngc C0mmss0n nd CcnIrl nk 0I Ngcr.
Thc cIvIcs n Ihc Inncl mrkcIs hvc grcI mplcI0ns I0r Ihc Inncl
mngcrs 0I c0mpny.
5.7.
. whch 0I Ihc I0ll0wng s N0T n nsIrumcnI 0I Ihc m0ncy mrkcI!
A CcrIIcIcs 0I dcp0sIs
C0mmcrcl bnks dcp0sIs
C nkcrs cccpInccs
0 SIIc rcvcnuc b0nds
E Trcsury blls
2. whch 0I Ihc I0ll0wng s N0T chrcIcrsIc 0I m0ncy mrkcI
nsIrumcnIs!
A Hgh lcvcl 0I lqudIy
Hgh lcvcl 0I sIcIy
C L0w mIurIy pcr0d
0 Hgh dcgrcc 0I rcIurn
E 000d nsIIuI0nl 0rgnsI0n.
3. Thc prcc I whch ncw ssucs rc mdc n Ihc prmry mrkcI s dcIcrmncd
by:
A SccurIy nd Exchngc C0mmss0n (SEC)
RcgsIrrs
C Ngcrn SI0ck Exchngc (NSE)
0 !ssung H0usc nd !ssung C0mpny
E SI0ckbr0kcrs
4. SIIc Ihc rclI0nshp bcIwccn ycld nd prcc 0I Ixcd nIcrcsI sccurIcs
A Thc hghcr Ihc ycld Ihc hghcr Ihc prcc.
Thc hghcr Ihc ycld Ihc l0wcr Ihc prcc.
C Thc ycld s lwys cqul I0 Ihc prcc.
0 Thc ycld s unrclIcd I0 Ihc prcc.
E Thc l0wcr Ihc ycld Ihc l0wcr Ihc prcc.
48
5. whch 0I Ihc I0ll0wng s N0T n dvnIgc 0I Fcdcrl 00vcrnmcnI Ixcd
nIcrcsI sccurIcs!
A Rsk
SIcIy 0I cpIl
C SIcIy 0I nc0mc
0 LqudIy
E 000d nsIIuI0nl rrngcmcnI
5.7.2
. !n Icrms 0I rsk, sIIc Ihc mn dIIcrcncc bcIwccn m0ncy mrkcI nd
cpIl mrkcI.
2. !n Icrms 0I numbcr 0I prIcs, whI s Ihc dIIcrcncc bcIwccn nkcrs'
cccpInccs (As) nd c0mmcrcl ppcrs (CPs).
3. SIIc Ihc mpcI 0I nIlI0n 0n m0ncy mrkcI nsIrumcnIs.
4. SIIc Ihc dIIcrcncc bcIwccn 'pr' vluc nd 'mrkcI vluc' 0I
g0vcrnmcnI Ixcd nIcrcsI sccurIy.
5. SIIc Ihc prmry IuncI0n 0I sI0ckbr0kcrs n Ihc cpIl mrkcIs.
49
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ !dcnIIy Ihc mn c0mp0ncnIs 0I c0rp0rIc pln,
+ UndcrsInd sIrIcgc Inncl plnnng, nd
+ ApprccIc vr0us gr0wIh sIrIcgcs.
Thc succcss 0I n 0rgnsI0n dcpcnds 0n Is sIrIcgc I0cus nd Is c0nInu0us
scrch I0r wys I0 rcch 0uI n ncw drccI0ns, crcIng nd IrnsI0rmng
vs0ns, I0 gudc Ihc c0mpny nI0 Ihc IuIurc.
Thc Icrm cn bc dcscrbcd s pr0ccss 0I p0lcy
I0rmulI0n, csIblshmcnI 0I g0ls nd 0b|ccIvcs s wcll s Ihc dcvcl0pmcnI
0I sIrIcgcs. !I s Ihc sysIcmIc rIculI0n 0I l0ngIcrm c0mpny 0b|ccIvcs
nd Ihc sIrIcgcs rcqurcd I0 chcvc Ihcm.
Tyl0r nd Sprkcs (977) dcscrbc C0rp0rIc Plnnng s sysIcmIc
cxcrcsc I0r dcIcrmnng Ihc I0Il rcs0urccs 0I Ihc 0rgnsI0n I0r Ihc
chcvcmcnI 0I Is qunIIcd 0b|ccIvcs wIhn spccIcd Imc Irmc.
SIrIcgc Plnnng, s dcIncd by PcIcr 0ruckcr (974) s Ihc c0nInu0us
pr0ccss 0I mkng prcscnI cnIrcprcncurl dccs0ns sysIcmIclly nd wIh
Ihc grcIcsI kn0wlcdgc 0I Ihc IuIurIy, 0rgnsng sysIcmIclly Ihc cII0rI
nccdcd I0 crry 0uI Ihcsc dccs0ns, nd mcsurng Ihc rcsulIs 0I Ihcsc
dccs0ns gnsI cxpccII0ns Ihr0ugh 0rgnscd sysIcmIc Iccdbck. !I
IIcmpIs I0 dcnIIy Ihc lncs 0I busncss n whch Ihc Irm hs Ihc grcIcsI
l0ngrun 0pp0rIunIcs nd dcvcl0p plns I0r chcvng succcss. SIrIcgc
plnnng Ikcs n 0vcrll, 'I0pb0II0m' vcw 0I Ihc c0mpny, sp0IlghIng
Ihc busncss rc n whch Ihc c0mpny hs Iruc c0mpcIIvc dvnIgc,
dcnIIyng busncss unIs I0 scll 0r lqudIc nd dccdng busncss unIs
IhI sh0uld bc cl0scd d0wn.
50
F0r n 0rgnsI0n I0 chcvc n cIIccIvc c0rp0rIc sIrIcgc plnnng, Ihc
SIrcngIhs, wckncsscs, 0pp0rIunIcs nd ThrcIs (Sw0T) nlyss s vcry
csscnIl. Ths s by csIblshng Is bsc sIrcngIhs, dcnIIyng Is
wckncsscs, nd cxmnng Ihc cnvr0nmcnI I0r vlblc 0pp0rIunIcs nd
Ih0sc IcI0rs IhI cn IhrcIcn Is survvl.
Thc I0ll0wng rc Ihc mn c0mp0ncnIs 0I C0rp0rIc Pln:
() EsIblshng c0mpny's 0b|ccIvcs nd IrgcIs I0 bc chcvcd
wIhn Imc h0rz0n.
(b) Exmnng Ihc cnvr0nmcnI I0r p0ssblc 0pp0rIunIcs.
(c) Apprsng Ihc SIrcngIhs, wckncsscs, 0pp0rIunIcs nd ThrcIs
(Sw0T).
(d) F0rmulIng sIrIcgcs, wIh lIcrnIvcs.
(c) !mplcmcnIng sIrIcgcs nd cI0n plns.
(I) PcrI0rmncc EvluI0n.
Thc csIblshmcnI 0I c0mpny's 0b|ccIvcs nd IrgcIs I0 bc chcvcd wIhn
Imc h0rz0n, s Ihc IrsI nd pr0bbly Ihc m0sI mp0rInI sIcp n Ihc
plnnng pr0ccss. !n dcIcrmnng c0mpny's 0b|ccIvc, mngcmcnI nd
cvcry mcmbcr 0I Ihc 0rgnsI0n sh0uld kn0w why Ihc c0mpny s n
cxsIcncc, Ihc purp0sc I0r whch I s csIblshcd nd whI I cxpccIs I0
chcvc wIhn Imc pcr0d. !I Ihcrc s n0 Imc h0rz0n, n0 0nc wll bc hcld
rcsp0nsblc I0r Ihc 0rgnsI0n's n0nIInmcnI 0I Ihc scI IrgcI(s).
FurIhcrm0rc, n 0rgnsI0n musI crry 0uI Is Sw0T nlyss crIclly
Ihr0ugh Ihc pprsl 0I Is prcscnI nd p0IcnIl rcs0urccs nd n rclI0n
I0 Is c0mpcII0rs wIhn nd 0uIsdc Ihc 0rgnsI0n.
!n 0rdcr I0 csIblsh Icsblc 0b|ccIvc, n 0rgnsI0n musI scrch
Is cnvr0nmcnI I0r 0pp0rIunIcs IhI my bc vlblc I0r
cxpl0II0n. !n cxmnng Ihc cnvr0nmcnI I0r 0pp0rIunIcs IhI
c0uld bc cxpl0Icd, Ihc 0rgnsI0n musI l00k I Ihc IuIurc
c0nscqucncc 0I cch 0pp0rIunIy.
5
H0wcvcr, cnvr0nmcnIl scnnng musI bc c0nInu0us pr0ccss sncc
Ihc c0rp0rIc w0rld s dynmc nd sub|ccI I0 IrcqucnI chngcs 0vcr
Imc nd s I0dy's IhrcIs my bcc0mc gr0wIh 0pp0rIunIcs n Ihc
ncr IuIurc.
AIIcr scIIng Ihc c0mpny's 0b|ccIvcs nd cxmnng Ihc cnvr0nmcnI
I0r 0pp0rIunIcs IhI my bc vlblc, Ihc 0rgnsI0n musI
cvluIc Is vlblc rcs0urccs, whcIhcr Ihcy rc dcquIc I0
cc0mplsh Ihc 0b|ccIvcs.
H0wcvcr, sncc n 0rgnsI0n cn hvc m0rc Ihn 0nc 0b|ccIvc I
Imc nd c0nscqucnIly my n0I bc blc I0 c0mplcIc cch 0nc
sIsIcI0rly duc I0 ndcquIc rcs0urccs, busncss dccs0n nlyss
Icchnquc such s 0sc0unIcd Csh Fl0w (0CF) Tcchnqucs nd
Pr0grmmcs EvluI0n Rcvcw Tcchnqucs (PERT), c0uld bc uscd n
dcIcrmnng Ihc vblIy, Imc 0I c0mplcI0n, Ihc c0sI nd rcs0urccs
0I rcschcdulng Ihc lIcrnIvc sIrIcgcs.
!I s n0I g00d cn0ugh I0 hvc |usI 0nc sIrIcgy. A lsI 0I p0ssblc
sIrIcgcs musI bc drwn up 0r dcvcl0pcd Ihr0ugh cIhcr brnsI0rmng
0r survcy 0I nI0rmcd 0pn0n, b0Ih wIhn nd 0uIsdc Ihc c0mpny.
Thc l0ngcr Ihc Icrm, nd Ihc wdcr Is rngc, Ihc bcIIcr.
Thc dcvcl0pcd sIrIcgcs sh0uld bc c0sI cIIccIvc nd bc dcsgncd I0
suI Ihc 0b|ccIvcs s wcll s bc wIhn Ihc rcs0urcc cpcIy 0I Ihc
0rgnsI0n. H0wcvcr, Ihc sIrIcgc 0pI0ns IhI n 0rgnsI0n
dcvcl0ps nd ch00scs musI bc sIrcIly wIhn Ihc Irmcw0rk 0I prc
csIblshcd p0lcy, Ilcxblc cn0ugh I0 cc0mm0dIc chngcs 0ccurrng
n Ihc cnvr0nmcnI nd n0I n c0nIlcI wIh Ihc c0mpny's 0vcrll
0rgnsI0nl purp0sc.
Thcrc rc vr0us sIrIcgcs IhI n 0rgnsI0n mghI d0pI n Is
dcsrc I0 survvc nd gr0w. 0r0wIh sIrIcgcs my bc nIcrnlly 0r
cxIcrnlly gcncrIcd nd my bc sIblc 0r dynmc.
An 0rgnsI0n cn dccdc I0 gr0w nIcrnlly by csIblshng
dvdcnd p0lcy IhI hs l0w py0uI rI0, Ihcrcby usng Ihc rcIncd
crnngs I0 Inncc Ihc gr0wIh. Thc gr0wIh c0uld bc Ihr0ugh
pcncIrIng Ihc mrkcI wIh l0wprccd, bcIIcr qulIy nd cIIccnI
52
pr0ducIs, nIr0ducng ncw pr0ducIs 0r ppr0chng ncw mrkcI.
H0wcvcr, n dcIcrmnng Ihc sIrIcgcs I0 d0pI, 0sI0n C0nsulIng
0r0up (C0) cmc up wIh m0dcl I0r puIIng Ihc Irm's sIrIcgc
p0sIurc I c0rp0rIc lcvcl n pr0pcr pcrspccIvc. Ths m0dcl s kn0wn
s C0 m0dcl.
!n Ihc m0dcl, busncsscs wcrc gr0upcd nI0 Iw0 ccll mIrx
cc0rdng I0 Ihcr mrkcI gr0wIh rIcs nd rclIvc mrkcI shrcs.
STARS w!L0 CATS
CASH C0wS 000S
rc bcsI pcrI0rmcrs rcprcscnIng supcr pr0II nd gr0wIh
0pp0rIunIcs n rpdly gr0wng mrkcI. Thcy rc pr0ducIs 0r
scrvccs IhI hvc hgh mrkcI shrc n hgh gr0wIh mrkcI, Ihcrcby
ncccssIIng Ihc c0mmImcnI 0I subsInIl rcs0urccs I0 mnIn
Is p0sI0n n Ihc mrkcI. SIrs 0IIcr Ihc bcsI 0pp0rIunIcs I0r
cxpns0n.
rc dcclnng sIrs nd pr0vdcrs 0I csh I0 bc uIlzcd
clscwhcrc n Ihc Irm. H0wcvcr, Is hgh mrkcI shrc ssurcs l0w
0pcrI0nl c0sIs, nd hgh pr0II nd csh Il0w gcncrI0n.
ls0 kn0wn s "qucsI0n mrks", rc 0pp0rIunIcs IhI
cn bc cIhcr dcvcl0pcd nI0 sIrs, I Ihc Irm cn cpIurc lrgcr
shrc n Ihc rpdly gr0wng mrkcIs, 0r dvcsI Ir0m I I Ihcy rcmn
unpr0IIblc 0n cc0unI 0I Ihc Irm's nblIy I0 ncrcsc Is mrkcI
shrc.
rc 0n wck c0mpcIIvc lcvcl nd 0IIcr lmIcd 0pp0rIunIcs
I0r mpr0vcmcnI bccusc Ihcy rc hrdly n p0sI0n I0 gcncrIc
csh Il0ws suIIccnI I0 susIn Ihcr cxsIcncc. ThcrcI0rc, Ihcy sh0uld
bc clmnIcd Ihr0ugh lqudI0n, 'spn0II', dvcsImcnI 0r
dsc0nInuncc.
53
F0r gr0wIh 0pp0rIunIcs 0uIsdc Ihc 0rgnsI0n, Ihc Irm mghI d0pI
mcrgcrs, cqusI0ns 0r dvcrsIcI0n nd 0Ihcr I0rms 0I busncss
c0mbnI0n sIrIcgcs n 0rdcr I0 cn|0y Ihc bcncIIs ccrung Ir0m
Ihc p00lng I0gcIhcr 0I rcs0urccs.
H0wcvcr, Ihc I0ll0wng IcI0rs usully shpc Ihc sIrIcgcs I0 bc
d0pIcd:
() 0pp0rIunIcs dcnIIcd n Ihc cnvr0nmcnI,
(b) 0rgnsI0nl c0mpcIcncc,
(c) Rcs0urcc cpblIcs,
(d) ThrcIs I0 0pp0rIunIcs n Ihc cnvr0nmcnI,
(c) S0cl 0blgI0ns,
(I) S0ccIl cIhcl vlucs, nd
(g) 0rgnsI0nl culIurc nd vluc sysIcm.
All Ihc 0b|ccIvcs, IrgcIs nd sIrIcgcs 0I n 0rgnsI0n nccd I0 bc
clcrly dcIncd I0r Ihc 0pcrI0nl mngcrs I0 mplcmcnI. Thcsc
sIrIcgcs musI bc IrnslIcd nI0 dcIlcd wcckly, m0nIhly, 0r ycrly
pln sncc Ihs wll ncccssIIc csy m0nI0rng n Ihc cxccuI0n 0I Ihc
sIrIcgcs. Thc dcIlcd 0pcrI0nl plns sh0uld ncludc whI s I0
bc d0nc, h0w, by wh0m nd whcn. TcIcs nd mcIh0d0l0gcs rc
ch0scn I0r cIIccncy n sssIng Ihc ch0scn sIrIcgy I0 chcvc Ihc
rcqurcd rcsulI.
Hvng br0kcn d0wn 0b|ccIvcs nd sIrIcgcs nI0 dcIlcd 0pcrI0nl
plns, pcrI0rmncc musI bc cvluIcd pcr0dclly I0 Ind 0uI I Ihc
0rgnsI0n s n Ihc c0ursc 0I chcvng Is c0rp0rIc 0b|ccIvcs.
PcrI0rmncc cvluI0n s Ihc pcr0dc rcvcw 0I rcsulIs gnsI scI
0b|ccIvcs nd sIrIcgcs I0 rcvcl whcIhcr Ihcrc s ny dcvI0n Ir0m
Ihc plns nd I nccd bc, ny c0rrccIvc cI0n. Thc mn c0nIcnI0n s
IhI n 0rgnsI0n sh0uld n0rmlly cmbrk up0n pr0|ccIs IhI ycld
p0sIvc NP\.
F0rccsIng s prcdcIng, whlc plnnng s Ikng cI0n 0n Ihc I0rccsI I0
mkc I n cc0n0mc rclIy. Plnnng s c0nccrncd wIh scIIng 0b|ccIvcs
nd Ihc mcns I0r Ihcr IInmcnI. !I s csscnIlly c0nccrncd wIh Ihc IuIurc,
54
IhcrcI0rc I musI bc n dcquIc prcdcIvc m0dcl whch musI hvc 0b|ccIvcs
nd lcd I0 hghcr lcvcl 0I pcrI0rmncc. Plnnng s IhcrcI0rc, cl0scly
rclIcd I0 budgcIng. !n IcI, budgcI s I00l I0r plnnng.
Thc succcss 0I ny 0rgnsI0n dcpcnds 0n Is sIrIcgc I0cus nd vs0n.
C0rp0rIc sIrIcgc plnnng nv0lvcs scckng Ihc rghI g0ls nd 0b|ccIvcs
I0r Ihc 0rgnsI0n wIhn Is c0mpcIcnccs, rcs0urccs nd blIy. SIrIcgc
plnnng hclps Ihc 0rgnsI0n n rcducng Ihc rsk 0I sIryng wy Ir0m
Is scI g0ls by cnggng n IIrcIvc nd mulIplc pr0|ccIs.
H0wcvcr, hvng sIrIcgy s n0I cn0ugh. Plnnng s csscnIl I0 IrnslIc
sIrIcgc vs0n nI0 rclIy. !I Ikcs c0rp0rIc plnnng I0 I0rcsIll c0rp0rIc
Ilurc. !n Ihs lghI, Ihc mn c0mp0ncnIs 0I c0rp0rIc pln rc dcnIIcd,
!I s sh0wn IhI plnnng s nIrcIcly lnkcd wIh budgcIng: budgcIng s
I00l I0r plnnng.
. Thc I0ll0wng rc Ihc mn c0mp0ncnIs 0I c0rp0rIc pln, EXCEPT:
A Apprsl 0I Ihc 0pp0rIunIy
PcrI0rmncc cvluI0n
C PrcdcI0ns
0 !mplcmcnIng sIrIcgcs
E F0rmulIng p0lccs.
2. Thc nccd I0r c0rp0rIc plnnng d0cs n0I ncludc 0NE 0I Ihc I0ll0wng:
A Asscssng Ihc l0ngIcrm IuIurc 0I c0mpny
PrcdcIng Ihc vlblc 0pp0rIunIcs whch Ihc c0mpny cn
cxpl0I
C ThrcIs whch cndngcr Ihc mngcr's |0bs
0 AsccrInng n whch rc 0I Ihc busncss I0 nvcsI Ihc rcs0urccs
0I Ihc c0mpny
E SIrIcgc plnnng.
3. !n I0rmulIng sIrIcgcs I0 bc d0pIcd Ihc I0ll0wng IcI0rs sh0uld bc
puI nI0 c0nsdcrI0n, EXCEPT
A Pr0IccI0n 0I I0p mngcmcnI's nIcrcsIs
s0cl 0blgI0ns
C 0rgnsI0nl culIurc nd vluc sysIcm
0 0rgnsI0nl c0mpcIcncc nd rcs0urccs cpblIcs
E MrkcI shrc nd pcncIrI0n.
55
4. Plnnng s c0nccrncd wIh Ihc I0ll0wng, EXCEPT
A Thc IuIurc pcr0d
Pr0vdng I0r unccrInIy
C PrcdcIng
0 udgcIng
E Pr0vdng I0r rsk.
5. whch 0NE 0I Ihc I0ll0wng d0cs n0I cxpln why c0rp0rIc plnnng s
mpcrIvc!
A FuIurc s unprcdcIblc
PrcdcI0ns rc susccpIblc I0 crr0rs
C 0ccs0n rclIng I0 c0rp0rIc plnnng rcsI 0n hunchcs
0 Thc pr0bblIy 0I IuIurc 0uIc0mc 0I cvcnI s unkn0wn
E 0ccs0n mkcrs cnn0I bc sscrIvc 0n IuIurc cvcnIs.
. Thc pr0ccss 0I p0lcy I0rmulI0n, csIblshmcnI 0I g0ls nd 0b|ccIvcs
nd Ihc dcvcl0pmcnI 0I sIrIcgcs s kn0wn s_____________
2. Thc c0nInu0us pr0ccss 0I mkng prcscnI cnIrcprcncurl dccs0ns
sysIcmIclly nd wIh Ihc grcIcsI kn0wlcdgc 0I Ihc IuIurc
c0nscqucnccs, 0rgnsng sysIcmIclly Ihc cII0rI nccdcd I0 crry 0uI
Ihcsc dccs0ns, nd mcsurng Ihc rcsulIs 0I Ihcsc dccs0ns gnsI
cxpccII0ns Ihr0ugh 0rgnscd sysIcmIc Iccdbck s kn0wn
s____________________
3. Thc mn c0nIcnI0n 0I c0rp0rIc plnnng s IhI n 0rgnzI0n sh0uld
lwys cmbrk up0n pr0|ccI IhI yclds__________________hvng
crIclly vcwcd Ihc nvcsImcnI.
4. _____________________rc schcmcs, mcIh0ds, mn0uvrcs whch
mngcmcnI h0pcs I0 dcpl0y n 0rdcr I0 m0vc Ihc 0rgnzI0n Ir0m Is
prcscnI p0sI0n I0 rrvc I Is IrgcI g0l by Ihc cnd 0I spccIc pcr0d,
rcc0gnsng IhI durng Ihc nIcrvcnng pcr0d, h0sI 0I chngcs my
Ikc plcc n Ihc cnvr0nmcnI.
5. ______________________ s vcry spccIc, c0ncrcIc, Imcb0und, clcr
nd qunIIblc sIIc 0I IIrs whch Ihc 0rgnzI0n s pursung.
57
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ Expln Ihc nIurc 0I dccs0n supp0rI sysIcm,
+ UndcrsInd Ihc nIurc 0I dccs0n supp0rI m0dcls nd s0IIwrc,
+ Expln pplcI0n pckgcs,
+ Expln s0mc 0I Ihc pplcI0ns rclyng 0n dccs0n supp0rI sysIcm nd rclcvncc
I0 Inncl mngcmcnI, nd
+ 0cInc s0mc rclcvnI Icrmn0l0gcs n nI0rmI0n nd c0mmuncI0n Icchn0l0gy
cnvr0nmcnI.
Thc prmry rcs0n why busncss cnIcrprscs Ikc dvnIgc 0I nI0rmI0n
Icchn0l0gy s I0 rcccvc supp0rI I0r Ihcr busncss dccs0ns. Ths rcs0n hd
bccn mdc m0rc I0rmdblc wIh Ihc cmcrgcncc 0I cC0mmcrcc rcv0luI0n
gnIcd by Ihc nIcrncI nd Ihc w0rldwdc wcb. usncss mngcrs n0w
0pcrIc n hghly c0mpcIIvc nd chngng gl0bl busncss cnvr0nmcnI
nd IhcrcI0rc rcqurc nI0rmI0n sysIcms IhI pr0vdc spccdy rcsp0nscs I0
c0mplcx busncss cnqurcs. All sIkch0ldcrs n cc0mmcrcc (Ihc
0rgnsI0ns nd cmpl0yccs nd mngcrs, supplcrs, cusI0mcrs) rcqurc
0n lnc rcl Imc nI0rmI0n I0 cnblc Ihcm mkc IsI dccs0ns. Thcy sh0uld
bc blc I0 gcI m0rc cusI0mscd nd pr0cIvc wcbbscd dccs0n supp0rI.
Thc ncw nI0rmI0n Icchn0l0gcs cnsurcd IhI Ihcsc rcqurcmcnIs wcrc mcI.
Thc Pcrs0nl C0mpuIcr (PC) wIh pplcI0n s0IIwrc, Ihc ncIw0rkcd clcnI
scrvcr rclI0nshp, nd Ihc ncIw0rkcd PC vcrs0n 0I Ihc dccs0n supp0rI
sysIcms nd Ihc cxccuIvc nI0rmI0n sysIcms pr0grmmcs mdc dccs0ns
supp0rI vlblc I0 ll sIkch0ldcrs. Ths Ircnd ws cccnIuIcd by Ihc
sh0ckng gr0wIh 0I nIrncIs nd cxIrncIs whch ncIw0rkcd cbusncss Irms
wIh Ihcr sIkch0ldcrs.
!n prIculr, wcbbscd nlyIcl Icchnqucs nd m0dcls cxsI I0 gvc
supp0rI I0 Ihc vr0us dccs0ns 0I Inncl mngcrs.
58
Plcsc n0Ic IhI Ihs sIudy pck d0cs n0I IIcmpI I0 cxpln Ihc Icchncl
spccIs 0I nI0rmI0n nd c0mmuncI0n Icchn0l0gy s Ihcsc rc bcy0nd
Ihc sc0pc. RIhcr, cmphss s plccd 0n h0w c0mpuIcr bscd dccs0n
supp0rI sysIcm (0SS) sssIs Inncl mngcrs n dccs0n mkng.
0ccs0n supp0rI sysIcms, unlkc Ihc IrdI0nl mngcmcnI nI0rmI0n
sysIcm (M!S), rc c0mpuIcrbscd nI0rmI0n sysIcms whch gvc busncss
mngcrs Ihc ncccssry nIcrcIvc nI0rmI0n supp0rI IhI hclp Ihcr
dccs0nmkng. 0SS rc n0rmlly uscd by Inncl mngcrs n Inncl
plnnng, Inncl m0dclng, nlysng lIcrnIvc c0urscs 0I cI0n nd
mkng Inncl dccs0ns. Fnncl mngcrs n0rmlly rcccvc dccs0n
supp0rI by nIcrcIng wIh Ihc c0mpuIcr sysIcm. 0SS usc nlyIcl m0dcls,
spcclscd dIbscs, nIcrcIvc c0mpuIcrbscd m0dclng pr0ccss plus
Ihc Inncl mngcr's 0wn nIuIvc kn0wlcdgc nd |udgmcnI I0 lcnd
supp0rI I0r Ihc mkng 0I scmsIrucIurcd Inncl dccs0ns. Thc cmphss
s 0n scmsIrucIurcd pr0blcms whcrc Ihc Inncl mngcr's nIcrcI0n
wIh Ihc c0mpuIcr sysIcm mghI mpr0vc hs blIy I0 s0lvc s0mc dIIculI
pr0blcms nv0lvng c0mplcx rclI0nshps. Thc Inncl mngcr uscs smll,
smplc Inncl m0dcls s gnsI c0mplcIcd nIcgrIcd sysIcms whch
rcqurc Ihc scrvccs 0I !T cxpcrIs.
!n summry, Ihc I0ll0wng rc Ihc mn chrcIcrsIcs 0I 0SS:
() !nI0rmI0n nd dccs0n supp0rI mcIh0ds rc uIlscd I0r crryng
0uI nlyss 0I spccIc pr0blcms, 0pp0rIunIcs nd IhrcIs,
(b) Pr0blcms c0nInng dI, whch rc scmsIrucIurcd nd ls0
nlyIcl pr0ccss whch s prIly c0mpuIcrscd nd prIly dcpcndcnI
0n Ihc Inncl mngcr's pcrs0nl nsghI nd |udgcmcnI,
(c) Thcrc rc nIcrcIvc cnqurcs nd rcsp0nscs bcIwccn Ihc Inncl
mngcr nd Ihc c0mpuIcr whch cnhncc Ihc pr0blcm s0lvng
pr0ccss,
(d) Thcrc rc n0 prcdcIcrmncd s0luI0ns 0r rcp0rIng I0rmIs. !nI0rmI0n
pr0ducIs rc dh0c, Ilcxblc nd n dpIblc I0rmIs, nd
(c) !nI0rmI0n s pr0duccd by nlyIcl m0dclng 0I Inncl dI.
c
As crlcr mcnI0ncd, dccs0n supp0rI sysIcms (0SS), unlkc Ihc 0ld
mngcmcnI nI0rmI0n sysIcms uIlsc m0dcl bscs nd dIbscs
n Ihcr supp0rI pr0vs0n. A 0SS m0dcl bsc s s0IIwrc c0mp0ncnI
59
c0mprsng m0dcls uscd n clculI0ns nd nlyscs whch
mIhcmIclly dsply rclI0nshps m0ng vrblcs such s slcs,
cxpcnscs nd ncI pr0II.
A Iypcl cxmplc 0I 0SS m0dcls s Ihc sprcdshccI. 0Ihcr 0SS m0dcl
ncludcs Inncl plnnng m0dcls, cpIl budgcIng m0dcls (prcscnI
vluc nd nIcrnl rIc 0I rcIurns m0dcls) lncr pr0grmmng m0dcls
nd nlyIcl m0dcls. Thcsc 0Ihcr m0dcls my bc n Ihc I0rm 0I
sprcdshccI m0dcls 0r sIIsIcl nd mIhcmIcl pr0grmmcs.
Thcsc rc pr0grms (s0IIwrc) IhI dcl wIh prIculr c0mmcrcl Isks
nd whch cn bc 0bIncd cIhcr drccIly Ir0m spcclsI s0IIwrc supplcrs
0r wrIIcn nh0usc. M0sI smll nd mcdum sclc cnIcrprscs dcpcnd 0nly
0n rcdymdc pckgcs I0r Isks.
ApplcI0n pckgcs rc usully cusI0mscd I0 II nI0 Ihc cnd uscrs nccds,
bscd 0n Ihc uscrs dI nccds, rcp0rI I0rmIs nd Ircqucncy, nIurc 0I
c0mpuII0ns nd s0 0n. M0sI pplcI0n pckgcs rc supplcd n m0dulcs,
Ihc ch0cc 0I whch dcpcnds 0n Ihc uscr.
Ths s n clccIr0nc w0rkshccI IhI cn bc uscd I0r vrcIy 0I Isks nd
pplcI0ns. Thc m0sI c0mm0n sprcdshccI pckgc n Ihc mrkcI n0w s
Exccl. Thc clccIr0nc w0rkshccI s rrngcd n r0ws nd c0lumns cllcd cclls,
Ihc c0nIcnIs 0I whch cn bc mnpulIcd n mny wys s rcqurcd by Ihc
uscr. F0r cxmplc, ccll c0nIcnIs cn bc ddcd 0r subIrcIcd 0r w0rkcd up0n
by m0rc c0mplcIcd I0rmul n whIcvcr I0rm I s nccdcd ncludng ny
prIculr c0mpuII0ns rcqurcd by Ihc uscr.
S0mc pplcI0ns 0I sprcdshccI pckgcs whch rc prIculrly rclcvnI
I0 Ihc Inncl mngcr rc brcIly cxplncd bcl0w:
An mp0rInI mcIh0d 0I c0nsIrucIng pr0|ccIcd Inncl sIIcmcnIs
I0r pcr0ds l0ngcr Ihn 0nc ycr s Ihr0ugh Ihc usc 0I 0SS bscd
Inncl plnnng m0dcls. Thcsc m0dcls rc sI0rcd n Ihc I0rm 0I
sprcd shccIs nd Ihcy cn bc pr0grmmcd I0 pr0vdc supp0rI I0r Ihc
Inncl mngcrs n Ihc I0ll0wng crcumsInccs:
() whcrc Ihcrc rc mny ssumpI0ns I0 bc mdc nd Ihcrc s
nccd I0 |0nIly dcIcrmnc Ihc mpcI 0I Ihcsc ssumpI0ns.
b0
(b) whcrc Ihcrc s nccd I0 sh0w Ihc cIIccIs 0I dIIcrcnI ssumpI0ns
0nc I Imc, sy, 0I slcs lcvcl, dIIcrcnI slcs prccs, npuI
c0sIs, 0n Ihc 0Ihcr pr0|ccIcd vrblcs n Ihc Inncl
sIIcmcnIs.
(c) whcrc Ihcrc s nccd I0 cvluIc dIIcrcnI Inncng plns nd
Ihcr cIIccIs 0n sgnIcnI vrblcs lkc crnngs pcr shrc,
dcbIcquIy rI0 nd s0 0n.
(d) whcrc I s ncccssry I0 m0dIy Ihc nIl pln bscd 0n Ihc
0uIc0mc 0I prcv0us pr0|ccI0ns. F0r cxmplc, plnncd slcs
mghI bc rcduccd I I bcc0mcs dIIculI I0 rsc Iunds, 0pcrIng
pr0ccss mghI bc d|usIcd n such wy IhI Ixcd cpcIy
rc mxmlly uIlscd nd c0mpny my cvcn Ihnk 0I
p0ssblc 0uIs0urcng 0I ny 0I Is mnuIcIurng 0pcrI0ns.
Thc cpIl budgcIng m0dcls (dsc0unIcd csh Il0ws) rc uscd I0
supp0rI Ihc Inncl mngcr n Ihc Inncl nlyss nd cvluI0n
0I dIIcrcnI cpIl nvcsImcnIs lIcrnIvcs. Thc rclcvnI dI n Ihc
dccs0n mkng pr0ccss s scmsIrucIurcd nd Ihc m0dcls hclp n
mkng ccrIn nlyss such s 'whI I' nlyss, scnsIvIy nlyss
nd s0 0n.
ElccIr0nc sprcdshccI pckgcs such s EXCEL hvc nbulI NP\ nd
!RR IuncI0ns n Ihcr pplcI0n pr0grms. Thc Isk cnIls npuI 0I
csh nIl0ws nd 0uIIl0ws wIh Ihcr rcspccIvc ycrs scprIcly nI0
Ihc ndvdul cclls 0I Ihc sprcdshccI nd kcy n Ihc dsc0unI rIc
ls0 n scprIc ccll. Thcn, cnIcr Ihc NP\ I0rmul, I0r cxmplc NP\
(F9, C0:C4)+C9. Ths mcns y0u rc Icllng y0ur PC I0 c0mpuIc usng
Ihc dsc0unI rIc cnIcrcd n ccll F9, Ihc prcscnI vluc 0I csh Il0ws
cnIcrcd n ccll C0 I0 ccll C4 nd Ihcn subIrcI Ihc nIl c0sI cnIcrcd
n ccll C9. N0Ic IhI C9 s ddcd bccusc I s lrcdy ncgIvc. !n Ihc
csc 0I !RR whI s nccdcd s |usI I0 npuI s b0vc Ihc csh Il0ws
l0ng wIh Ihcr rcspccIvc ycrs nd cnIcr Ihc !RR I0rmul, I0r
cxmplc !RR (C8:C2). Hcrc, Ihc PC s bcng drccIcd I0 Ind Ihc !RR 0I
pr0|ccI wh0sc csh Il0ws rc n Ihc ccll C8 I0 C2. !I sh0uld bc n0Icd
IhI Ihc csh Il0w cnIcrcd n ycr 0 hs ncgIvc sgn sh0wng Ihc
nIl m0unI puI nI0 Ihc pr0|ccI.
Thc I0rmulI0n 0I nd Ihc pr0IIcrcd s0luI0ns I0 lncr pr0grmmng
pr0blcms lcnd IsclI I0 Ihc uIlsI0n 0I Ihc c0mpuIcrbscd 0SS. !n
such pr0blcms Ihcrc my bc mny c0nsIrnIs nd nIcrcIng
b
vrblcs whch mghI mkc s0luI0ns I0 such pr0blcms vcry lb0ur0us
nd pr0bbly mp0ssblc undcr mnul ppr0ch.
Thc usc 0I 0SS cnIls Iypcl nIcrcIvc nlyIcl pr0ccss
c0mprsng nlyss such s 'whI I' nlyss, scnsIvIy nlyss
nd s0 0n. Hcrc, lIcrnIvc 'whIIchngcs' n npuI vrblcs cn
bc cnIcrcd by Ihc Inncl mngcr nI0 Ihc c0mpuIcr. Thc 0SS
s0IIwrc pckgc mghI sh0w scrcs 0I 0uIc0mcs n rcsp0nsc I0 sy
whII chngcs. !n Ihs csc Inncl mngcrs rc n0I skng I0r
prcnI0rmI0n. !nsIcd Ihcy rc cxmnng ll p0ssblc lIcrnIvcs.
Thcy nccd n0I dccdc n dvncc whI nI0rmI0n Ihcy nccd. whI
Ihcy d0 s I0 uIlsc Ihc 0SS I0 gcI Ihc nI0rmI0n Ihcy rcqurc I0 sssI
Ihcm n rrvng I dccs0n. Ths s Ihc uscIulncss 0I 0SS.
Thc I0ll0wng nlyIcl m0dclng Isks, m0ng 0Ihcrs, mkc up, Ihc
nlyIcl spccIs 0I 0SS:
!n Ihs knd 0I nlyss, Ihc Inncl mngcr chngcs s0mc
vrblcs 0r Ihcr nIcrrclI0nshps nd 0bscrvcs Ihc cIIccIs 0I
Ihcsc chngcs 0n 0Ihcr vrblcs. F0r nsIncc, n cpIl
budgcIng, Ihc Inncl mngcr (usng sprcdshccI) mghI
wnI I0 chngc Ihc nIl m0unI I0 bc nvcsIcd duc I0 cpIl
c0nsIrnI. Thc sprcdshccI pr0grm wll rcc0mpuIc ll Ihc
vrblcs n Ihc sprcdshccI IhI rc IIccIcd by Ihc chngc.
Thc vlucs 0I Ihcsc vrblcs w0uld bc 0bscrvcd prIculrly
Ihc NP\ (Ihc dccs0n crIcr0n) nd cvluIcd cc0rdngly. A
rcpcI 0I Ihs nlyss wll bc crrcd 0uI unIl Ihc 0uIc0mc 0I
Ihc vr0us chngcs s sIsIcI0ry.
Ths s vrnI 0I Ihc whII nlyss. Hcrc Ihc vluc 0I
0nly 0nc vrblc s lIcrcd mny Imcs nd Ihc cIIccIs 0n ll
0Ihcr vrblcs rc 0bscrvcd by Ihc Inncl mngcr. Thcrc
rc s0mc 0SS s0IIwrc pckgcs IhI uI0mIclly mkc
rcpcIcd mn0r lIcrI0ns I0 vrblc whcn c0mmndcd I0
crry 0uI scnsIvIy nlyss. Sncc Ihc npuI vrblcs rc
csImIcd nd IhcrcI0rc sub|ccI I0 chngc, Ihcrc s nccd I0
pcrI0rm scnsIvIy nlyss I0 scc h0w Ihc b0II0m lnc Igurc
scI by Ihc NP\ rccI I0 smll chngc n crIcl npuI IcI0r
such s Ihc nIl nvcsImcnI, Ihc dsc0unI rIc 0r Ihc Ix rIc.
b2
7.4.4.3
Ths s rcvcrsc 0I whII nlyss whcrc Ihc dccs0n mkcr
chngcs Ihc ulImIc rcsulI rcpcIcdly nd cch Imc rscs
IundmcnIl qucsI0n 0n h0w Ihc c0mpny cn chcvc Ihc ncw
rcsulI. Ths s vcry uscIul nlyIcl mcIh0d n Inncl
plnnng whcn Iryng I0 chcvc, I0r nsIncc, prIculr rcIurn
0n cpIl cmpl0ycd. 0vcn Ihc ncI sscIs cmpl0ycd, Ihc ncI
pr0II IIcr Ix mghI bc sub|ccIcd I0 rcpcIcd chngcs nd Ihc
cIIccI 0I such chngcs 0n 0Ihcr vrblcs wIhn Ihc sprcdshccI
0bscrvcd. A qucsI0n IhI rscs s h0w Ihc ncw pr0II lcvcl s I0
bc IIncd. !I my bc IhI mIcrls c0nIr0l hs I0 bc IghIcncd
0r lb0ur Iypcs hvc I0 bc pr0pcrly cxmncd 0r Ihcrc my cvcn
bc nccd I0 pr0pcrly cxmnc Ixcd c0sIs I0 scc I Ihcy cn bc
v0dcd. Agn, my bc I s Ihc c0mpny's mrkcIng cII0rIs
IhI hvc I0 bc nIcnsIcd I0 rsc v0lumc whcrc Ihc ncrcscd
v0lumc cn bc bs0rbcd by Ihc mrkcI. Ths nlyss s ls0
kn0wn s g0lscckng nlyss.
Ths s vcry uscIul nlyss whcn Inncl mngcrs rc
c0nIr0nIcd wIh c0mplcx pr0blcms nv0lvng dcIcrmnI0n 0I
Ihc mxmum lcvcl 0r mnmum lcvcl vrblc c0uld IIn
n Ihc Icc 0I spccIcd lmIng IcI0rs. Hcrc, Ihc 0b|ccIvc s I0
l00k I0r n 0pIml vluc 0I vrblc sub|ccI I0 numbcr 0I
c0nsIrnIs. F0r cxmplc, Ihc Inncl mngcr mghI wnI I0
mxmsc Ihc ncI prcscnI vluc 0I Ihc c0nIrbuI0ns Ir0m Iw0 0r
Ihrcc pr0ducI IhI usc c0mm0n rcs0urccs whcrc Iw0 0r m0rc 0I
Ihc rcs0urccs, lb0ur, mchncs h0urs, mIcrls 0r IclIcs
rc c0nsIrnIs I0 Ihc chcvcmcnI 0I Ihc spccIcd mxmsI0n
0b|ccIvc. Ths s Iypcl mulIc0nsIrnI lncr pr0grmmng
pr0blcm whch rcqurcs Ihc supp0rI 0I 0SS I0 bc blc I0 s0lvc
Ihc pr0blcm.
Thcrc rc s0mc rclcvnI Icrmn0l0gcs n !CT whch sh0uld bc 0I nIcrcsI I0
Ihc Inncl mngcr. Thcy rc brcIly dcscrbcd bcl0w.
ElccIr0nc c0mmcrcc s Ihc pr0ccss 0I d0ng busncss clccIr0nclly. !I
nv0lvcs Ihc uI0mI0n 0I vrcIy 0I busncssI0busncss nd
busncssI0c0nsumcr IrnscI0ns Ihr0ugh rclblc nd sccurc
c0nnccI0ns, cspcclly Ihc !nIcrncI.
b3
ElccIr0nc C0mmcrcc s Ihc pplcI0n 0I vr0us c0mmuncI0ns
Icchn0l0gcs I0 pr0vdc Ihc uI0mIcd cxchngc 0I busncss
nI0rmI0n wIh nIcrnl nd cxIcrnl cusI0mcrs, supplcrs nd
Inncl nsIIuI0ns. Exmplcs 0I Ihcsc Icchn0l0gcs ncludc
ElccIr0nc 0I !nIcrchngc (E0!), br c0dng, scnnng, Eml nd
Ix. ElccIr0nc C0mmcrcc, smply puI, s Ihc uI0mI0n 0I Ihc busncss
pr0ccss bcIwccn buycrs nd scllcrs.
!s Ihc cxchngc 0I busncss dI usng n undcrsI00d dI I0rmI. !I
prcdIcs I0dy's !nIcrncI. E0! nv0lvcs dI cxchngc m0ng prIcs
IhI kn0w cch 0Ihcr wcll nd mkc rrngcmcnIs I0r 0ncI00nc (0r
p0nII0p0nI) c0nnccI0n.
E0! s sIndrd I0rmI I0r cxchngng busncss dI. An E0! mcssgc
c0nIns sIrng 0I dI clcmcnIs, cch 0I whch rcprcscnIs sngulr
IcI, such s prcc, pr0ducI m0dcl numbcr, nd s0 I0rIh, scprIcd
by dclmIcr. Thc cnIrc sIrng s cllcd dI scgmcnI. 0nc 0r m0rc
dI scgmcnIs Irmcd by hcdcr nd Irlcr I0rm IrnscI0n scI,
whch s Ihc E0! unI 0I Irnsmss0n (cquvlcnI I0 mcssgc). A
IrnscI0n scI 0IIcn c0nssIs 0I whI w0uld usully bc c0nIncd n
Iypcl busncss d0cumcnI 0r I0rm. Thc prIcs wh0 cxchngc E0!
Irnsmss0ns rc rcIcrrcd I0 s Irdng prIncrs. E0! mcssgcs cn
bc cncrypIcd I0 prcvcnI unuIh0rzcd cccss.
Thc c0sIbcncII 0I ny pr0|ccI sh0uld bc cvluIcd bcI0rc
nvcsIng Iunds n IhI pr0|ccI. Thc I0ll0wng rc Ihc bcncIIs
nd c0sI 0I E0!.
() FsI m0vcmcnI 0I nI0rmI0n nd pymcnIs.
(b) SysIcm s vcry rclblc s Ihcrc s rclIvc Irnsprcncy.
(c) !mpr0vcd csh mngcmcnI.
(d) Svngs n c0sIrcducI0n n ml, ppcr nd d0cumcnI
sI0rgc c0sIs.
(c) 000dwll rsng Ir0m bcncIIs ccrublc I0 cusI0mcrs.
(I) ElmnI0n 0I dlc csh (Il0I).
() Nccd I0r subsInIl nvcsImcnI n c0mpuIcr hrdwrc
nd s0IIwrc, Ih0ugh Ihcsc c0sIs hvc bccn dr0ppng
shrply n rcccnI Imcs,
b4
(b) Nccd I0 Irn cmpl0yccs I0 0pcrIc Ihc sysIcm
(c) EII0rIs nd Imc rcqurcd I0 w00 busncss prIncrs
(supplcrs nd cusI0mcrs) nI0 d0ng busncss
clccIr0nclly wIh Ihc c0mpny.
Ths s n mp0rInI prI 0I E0!. !Is slcnI IcIurc s IhI whI s
bcng IrnsIcrrcd s "vluc." Hcrc dcp0sI Ikng Inncl nsIIuI0ns
(c0mmcrcl bnks) scnd nd rcccvc m0ncy n clccIr0nc I0rm. EFT,
whcn vcwcd l0clly w0uld ncludc "FrsI nk wcsIcrn Un0n M0ncy
TrnsIcr", 'UA. M0ncy 0rm, CSCS IrnscI0ns wIhn Ihc Ir0 0I Ihc
CSCS, Ihc N!SS nd Ihc SI0ckbr0kcrs, Ihc uI0mIcd clcrng sysIcm
IrnscI0n bcIwccn Ihc clcrng h0uscs (Ihc dcsgnIcd c0mmcrcl
bnks) nd N!SS.
Fr0m Ihc gl0bl p0nI 0I vcw, EFT my nv0lvc nsIrucI0ns nd
IrnsIcrs by wy 0I Ihc S0ccIy I0r w0rldwdc !nIcrbnk Fnncl
Tclcc0mmuncI0n (Sw!FT) nd Ihc Clcrng H0usc !nIcrbnk
PymcnI SysIcm (CH!PS).
Ths s Ihc scc0nd mp0rInI prI 0I E0!. !I cnIls Ihc cxchngc 0I
clccIr0nc busncss nI0rmI0n (n0nvluc IrnsIcrs) bcIwccn
c0mpny nd Is bnk 0r bcIwccn 0nc bnk nd Ihc 0Ihcr. Exmplcs
ncludc, nI0rmI0n b0uI cusI0mcr's bnk cc0unIs blnccs,
nIcrbnk lcndng nd b0rr0wng rIcs, sp0I nd I0rwrd cxchngc
rIcs nd s0 0n.
!I sh0uld bc n0Icd IhI cusncss Irms sIll crry0uI s0mc ppcr
IrnscI0ns. !n s0mc nsInccs, Ihcy mghI hvc I0 d0 Ihs I0r lcgl
rcs0ns.
Thc !nIcrncI s gl0bl ncIw0rk 0I c0mpuIcrs nd c0mmuncI0n
dcvccs. !I s ls0 publc ncIw0rk IhI c0nnccIs scvcrl c0mpuIcrs,
c0mmuncI0n dcvccs nd smllcr ncIw0rks nI0 gl0bl ncIw0rk.
Thcrc rc mny dIIcrcnI Iypcs 0I c0mpuIcrs 0n Ihc !nIcrncI pcrs0nl
c0mpuIcrs, mnIrmcs nd mnc0mpuIcrs, McnI0shcs, nd 0Ihcrs
nd mny 0I Ihcsc c0mpuIcrs usc dIIcrcnI 0pcrIng sysIcm plII0rms
nd dcvccs, nd rc prIs 0I smllcr ncIw0rks, whch mkc up Ihc
!nIcrncI.
Thcsc c0mpuIcrs rc c0nnccIcd I0gcIhcr n c0nInu0usly gr0wng
ncIw0rk. M0sI 0I Ihc physcl c0nnccI0ns c0nssI 0I 0pIcl cblcs 0r
Iclcph0nc lncs IhI rc cIhcr b0ughI 0r lcscd Ir0m Iclcph0nc
b5
c0mpncs. !n s0mc cscs sgnls rc IrnsmIIcd v sIcllIc lnks.
Mny 0I Ihc c0nnccI0ns rc ls0 uscd I0r 0Ihcr purp0scs, lkc 0rdnry
v0cc Iclcph0nc clls. And mny 0I Ihc c0mpuIcrs rc 0nly IIchcd I0
Ihc !nIcrncI 0ccs0nlly. Thc cscsI wy I0 undcrsInd Ihc !nIcrncI
s I0 usc I.
A prvIc ncIw0rk nsdc c0mpny 0r 0rgnzI0n IhI uscs Ihc smc
knds 0I s0IIwrc IhI w0uld bc I0und 0n Ihc publc !nIcrncI, buI 0nly
I0r nIcrnl usc.
An cxIcndcd prvIc ncIw0rk IhI uscs !nIcrncI c0mmuncI0n
sIndrds nd Ihc publc Iclcc0mmuncI0n sysIcm I0 shrc prI 0I
busncss's nI0rmI0n 0r 0pcrI0ns (such s c0mpny's !nIrncI)
sccurcly wIh supplcrs, vcnd0rs, prIncrs, cusI0mcrs, 0r 0Ihcr
busncsscs.
ElccIr0nc bnkng, ls0 kn0wn s clccIr0nc Iund IrnsIcr (EFT), uscs
c0mpuIcr nd clccIr0nc Icchn0l0gy s subsIIuIc I0r chcqucs nd
0Ihcr ppcr IrnscI0ns. EFTs rc nIIcd Ihr0ugh dcvccs lkc crds
0r c0dcs IhI lcI cusI0mcrs 0r Ih0sc uIh0rscd by hm hvc cccss I0
hs cc0unI. Mny Inncl nsIIuI0ns usc ATM 0r dcbI crds nd
Pcrs0nl !dcnIIcI0n Numbcrs (P!Ns) I0r Ihs purp0sc. S0mc usc 0Ihcr
I0rms 0I dcbI crds such s Ih0sc IhI rcqurc, I Ihc m0sI, cusI0mcr's
sgnIurc 0r scn.
whcrcs nI0rmI0n undcr Ihc IrdI0nl mngcmcnI nI0rmI0n sysIcms
s pr0vdcd v pcr0dc, cxccpI0nl rcp0rIs, nI0rmI0n n 0SS s 0bIncd
Ihr0ugh nIcrcI0ns wIh Ihc c0mpuIcrs, c0mmnd 0I cnqurcs nd
nsInInc0us rcccpI 0I rcsp0nscs. Hcncc ll Ih0sc qulIcs 0I g00d rcp0rIng
sysIcm undcr 0ld M!S my n0I bc rclly rclcvnI n 0SS.
Thc mplcI0ns 0I nI0rmI0n nd c0mmuncI0n Icchn0l0gy (!CT) I0r Ihc
Inncl mngcrs n busncss 0rgnsI0n rc Ircmcnd0us. Fnncl
mngcrs rc dccs0n mkcrs n Iypcl busncss cnIIy. Thc rclcvnI
nI0rmI0n sysIcm n Ihc !CT cnvr0nmcnI s Ihc 0ccs0n supp0rI sysIcm
(0SS). Thc mn IhrusI 0I Ihc sysIcm s I0 pr0vdc supp0rI I0 dccs0n mkcrs
bb
(ncludng Ihc Inncl mngcrs) I0 cnblc Ihcm mkc spccdy, Imcly nd
ccurIc dccs0ns rcgrdng c0mplcx busncss pr0blcms. 0SS, ls0 kn0wn
s EndUscr c0mpuIng sysIcm, uscs nlyIcl m0dcls, spcclzcd
dIbscs nd nIcrcIvc c0mpuIcrbscd m0dclng I0 gvc supp0rI I0 Ihc
dccs0n mkcr wh0, wIh hs 0wn nIuIvc kn0wlcdgc nd |udgmcnI, s
cxpccIcd I0 mkc hs dccs0ns quckly nd ccurIcly.
Exmplcs 0I pplcI0ns whch rcccvc supp0rI Ir0m 0SS, Ir0m Ihc vcw
p0nI 0I Inncl mngcmcnI, ncludc, buI n0I lmIcd I0, Inncl plnnng,
cpIl nvcsImcnI pprsl, c0mplcx 0pImzI0n pr0blcms, nd s0mc
nlyscs ncludng scnsIvIy nlyss. A m|0r s0IIwrc uscd by 0SS s Ihc
sprcdshccI. H0wcvcr Ihcrc rc 0Ihcr pr0grmmcs rclIng I0 Ihc b0vc
pplcI0ns whch my bc n Ihc I0rm 0I sprcdshccIs.
ApplcI0n pckgcs rc vlblc n Ihc mrkcI nd cn bc csly 0bIncd
I l0w c0sIs. Thcy rc usully cusI0mscd I0 mccI cnduscrs' rcqurcmcnIs.
0SS nlyIcl m0dcls rc cpblc 0I crryng 0uI I0ur m|0r Iypcs 0I nlyss
Ihc 'whII' nlyss, scnsIvIy nlyss, IrgcIscckng nlyss nd
0pImzng nlyss. Thcrc rc ccrIn Icrmn0l0gcs IhI rc w0rIh kn0wng
by Inncl mngcrs, prIculrly Ihc Ircsury mngcrs. Thcsc ncludc
cbusncss, cc0mmuncI0n.
7.8.
. whch 0I Ihc I0ll0wng s n0I rclly n dvnIgc n Ihc nI0rmI0n
pr0duccd by Ihc 0ccs0n Supp0rI SysIcm!
A Accurcy
\0lumc
C C0mplcxIy 0I rclI0nshp
0 AuI0mIc dccs0n mkng
E ClculIng cpblIy
2. whch 0I Ihc I0ll0wng d0cs n0I pr0vdc spccd dvnIgc whcn Inncl
mngcr nIcrcIs wIh Ihc c0mpuIcr!
A PrnIng
UpdIng
C 0I npuI v Ihc kcy b0rd
0 !nI0rmI0n rcIrcvl
E Flc rcdng
b7
3. whch 0I Ihc I0ll0wng s n0I n pplcI0n 0I dccs0n supp0rI sysIcms!
A Csh budgcIng
CpIl nvcsImcnI pprsl
C Pyr0ll nlyss
0 ScnsIvIy nlyss
E 0pImum lcvcl nlyss
4. Thc nIcrnI0nl ncIw0rk 0I c0mpuIcrs lnkng cmpl0yccs 0I c0mpny
wIh c0mpuIcrs n Ihc c0mpny s kn0wn s
A ExIrncIs
!nIcrncI
C 0nlnc n rcl Imc
0 !nIrncIs
E Ecmpl0yccs
5. Thc 0SS nlyIcl m0dcllng mkcs usc 0I Ihc I0ll0wng m0dcls EXCEPT
A whI I nlyIcl m0dcl
IrgcI scckng nlyIcl m0dcl
C 0pImum lcvcl nlyIcl m0dcl
0 scnsIvIy nlyIcl m0dcl
E nvcnI0ry c0nIr0l m0dcl
. Thc cxchngc 0I busncss nI0rmI0n n n0nppcr I0rmI n n
nI0rmI0n Icchn0l0gy (!T) cnvr0nmcnI s kn0wn s ______________
2. Thc IrnsIcr 0I busncss nI0rmI0n 0n such IrnscI0ns s 0rdcrng,
nd dspIchng, n c0mpuIcrrcdblc I0rmI s cllcd______________
3. !n Icrms 0I dccs0ns, sIIc 0NE dIIcrcncc bcIwccn Ihc IrdI0nl
mngcmcnI nI0rmI0n sysIcm nd Ihc 0ccs0n Supp0rI SysIcm.
4. !n Icrms 0I sIrucIurc h0w w0uld y0u clssIy Inncl mngcmcnI
pr0blcms n n nI0rmI0n Icchn0l0gy (!T) cnvr0nmcnI!
5. !n Ihc c0nIcxI 0I pr0vs0n 0I supp0rI I0r mngcrs 0I busncss
0rgnsI0n by 0SS, whI s Ihc lcvcl 0I mngcmcnI nI0 whch Inncl
mngcrs Ill!
b9
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ Expln Ihc c0nccpI 0I Imc vluc 0I m0ncy,
+ UndcrsInd nd pply c0mp0und nIcrcsI,
+ ClculIc Ihc prcscnI vluc 0I IuIurc lump sum,
+ 0cInc n nnuIy, dIIcrcnIIc bcIwccn 0rdnry nnuIy nd nnuIy duc, clculIc
nd pply Ihc IuIurc vlucs 0I n 0rdnry nnuIy nd nnuIy duc,
+ Apply Ihc I0rmul uscd n Ihc IuIurc vluc 0I n 0rdnry nnuIy I0 Ihc 0pcrI0n
0I snkng Iund, nd
+ ClculIc Ihc prcscnI vluc 0I n 0rdnry nnuIy nd nnuIy duc, Ihc prcscnI
vluc 0I n 0rdnry nnuIy I0 l0n m0rIsI0n Iblc nd Is pplcI0n.
MIhcmIcs 0I Inncc c0nssIs 0I mIhcmIcl I0rmulc IhI brng nI0
I0cus Ihc Imc vluc 0I m0ncy - vcry mp0rInI c0nccpI n Inncl dccs0n
mkng. !n Inncl dccs0nmkng, csh Il0ws 0ccur nI0 Ihc IuIurc nd
I dIIcrcnI Imcs. uI, dccs0ns hvc I0 bc mdc n0w. Thus, Inncl
mngcrs musI Ind wy 0I c0nvcrIng Ihc IuIurc csh Il0ws I0 Ihcr prcscnI
w0rIh, usng Ihc ppr0prIc dsc0unIng I00ls.
Fnncl dccs0ns rcc0gnsc IhI m0ncy hs vluc 0vcr Imc. Ths mcns
IhI n m0unI 0I m0ncy n0w, hs grcIcr vluc Ihn Ihc smc m0unI I
s0mc Imc n Ihc IuIurc. Ths dc s bscd 0n Ihc IcI IhI I y0u hvc x
nr n0w, y0u cn mkc I I0 w0rk I0r y0u s0 IhI y0u 0bIn x plus nr
n Ihc IuIurc. 0vcn Ihs sIuI0n, lcndcrs 0I m0ncy w0uld ls0 wnI I0 bc
c0mpcnsIcd Innclly I0r prIng wIh prcscnI c0nsumpI0n. Thc m0unI
Ihcy rcccvc s kn0wn s nIcrcsI. !I sh0uld bc n0Icd IhI Ihs nIcrcsI wll bc
chrgcd cvcn I n0 nIlI0n s nIcpIcd nd I s ccrIn IhI Ihc m0ncy
wll bc rcccvcd.
70
!nIcrcsI, lkc c0mm0dIy prcc n Ihc c0mm0dIy mrkcIs, s Ihc prcc 0nc
pys I0r m0ncy n Ihc Inncl mrkcIs. !I s IhI vIl IcI0r IhI s uscd I0
qunIIy Ihc Imc vluc 0I m0ncy. !nIcrcsI rIc mkcs p0ssblc Ihc c0nvcrs0n
0I Ihc vlucs 0I csh Il0ws hvng dIIcrcnI Imngs I0 dcsrcd p0nI n
Imc, I0r Ihc purp0sc 0I Inncl dccs0nmkng. Thus, prcscnI vlucs, wIh
Ihc d 0I nIcrcsI rIc cn bc c0nvcrIcd I0 IuIurc vlucs nd vcc vcrs.
As gnsI smplc nIcrcsI, whcrc nIcrcsI s chrgcd 0n Ihc prncpl 0nly
I0r Ihc rclcvnI pcr0d, c0mp0und nIcrcsI s chrgcd nd ddcd I0 Ihc
prncpl Ir0m pcr0d I0 pcr0d, b0Ih prncpl nd nIcrcsI I0rmng Ihc bss
0I Ihc ncxI pcr0d nIcrcsI clculI0n. !n cIIccI, nIcrcsI s bcng crncd 0n
nIcrcsI.
0nc rc n whch Ihc c0mp0und nIcrcsI prncplc s pplcd s whcrc
snglc lump sum s dcp0sIcd, I0r cxmplc, n svngs 0r Ixcd dcp0sI
cc0unI I spccIcd rIc 0I nIcrcsI pcr pcr0d. Ths dcp0sI s ll0wcd I0
gr0w undsIurbcd whlc Ihc nIcrcsI s ssumcd I0 bc rcnvcsIcd.
Assumc n m0unI 0I N,000 s puI n Ixcd dcp0sI cc0unI I0r 3 ycrs I
Ihc rIc 0I 2 pcr ccnI pcr nnum. !I Ihc m0unI s lcII unI0uchcd, whI wll
bc Ihc w0rIh 0I Ihc nvcsImcnI I Ihc cnd 0I Ihc Ihrd ycr!
End 0I ycr : ,000 (.2) = ,20.00
End 0I ycr 2: ,000 (.2)(.2) = ,000(.2)
2
= ,254.40
End 0I ycr 3: ,000 (.2)(.2)(.2) = ,000(.2)
3
= ,404.93
7
F\
n
= P
0
(+r)
n
. !I Ihc 0rgnl nvcsImcnI wcrc ll0wcd I0 gr0w I0r Icn
ycrs, Is w0rIh I Ihc cnd 0I Icn ycrs w0uld bc:
F\
0
= ,000(.2)
0
= 3,05.85
Thcrc rc s0mc nvcsImcnIs whcrc nIcrcsI s c0mp0undcd m0rc Ihn 0ncc
durng Ihc ycr. Ths mcIh0d s pplcblc I0 Ixcddcp0sI cc0unIs nd 0Ihcr
svngs nsIrumcnIs. !I ncrcscs Ihc cIIccIvc nIcrcsI rIc, ssumng nIcrcsI
s c0mp0undcd Imcs durng Ihc ycr.
Thc b0vc I0rmul s vrcd Ihus:
( )
mn
0 n
m
r
P F\ + =
!I, nIcrcsI 0n Ihc b0vc nvcsImcnI 0I N,000 s I0 bc c0mp0undcd m0nIhly
(nsIcd 0I 0ncc n Ihc ycr), whI wll bc Ihc vluc I Ihc cnd 0I 0nc ycr:
AI Ihc cnd 0I 0nc ycr, Ihc vluc wll bc:
( )
x 2
n
2
2 . 0
000 F\ + =
= ,000 |(.0)
2
|
= ,2b.83
Sncc N,000 gr0ws I0 N,2b.83 n 0nc ycr, Ihs s cquvlcnI I0 n cIIccIvc
nIcrcsI rIc 0I 2.b8 pcrccnI, s I0ll0ws:
b8 . 2

00
x
00 . 000
83 . 2b
=
.
Ths s sIuI0n whcrc c0mp0undng pcr0ds rc nInIcly sh0rI, such IhI
, Ihc numbcr 0I Imcs ycr nIcrcsI s c0mp0undcd ppr0chcs nInIy. !n
72
Ihs csc Ihc Icrm ( +
r
/
m
)
mn
ppr0chcs c
rn
whcrc c s symb0l I0r Ihc
rrI0nl numbcr 2.7828 nd cn bc rcprcscnIcd by Ihc I0rmul:
whI s Ihc vluc I Ihc cnd 0I Ihrcc ycrs 0I N,000 dcp0sIcd I 2 pcrccnI
pcr nnum wIh nIcrcsI c0mp0undcd c0nInu0usly!
Thc vluc wll bc:
F\
3
= P
0
(c
r n
) =
( )( )
| | 000
3 2 . 0

= (2.7828
0.3b
) ,000
= ,433.33
Ths s Ihc mxmum p0ssblc IuIurc vluc 0I ,000 I Ihc cnd 0I Ihrcc
ycrs. C0nInu0us c0mp0undng mplcs IhI whcrc Ihc rcIurn 0n nvcsImcnI
s vlblc mmcdIcly I s crncd, I s nsInIly rcnvcsIcd I0 crn m0rc.
Ths rulc sys 72 sh0uld bc dvdcd by Ihc nIcrcsI rIc I0 Ind
Ihc numbcr 0I ycrs I wll Ikc I0 d0ublc n m0unI 0I m0ncy.
AlIcrnIvcly, Ihc rulc hclps I0 0bIn Ihc rIc 0I nIcrcsI IhI
n m0unI 0I m0ncy musI crn I IhI m0ncy s I0 d0ublc durng
gvcn numbcr 0I ycrs. F0r cxmplc, I nIcrcsI rIc 0n
svngs cc0unI s 8 pcrccnI I wll Ikc 9 ycrs I0 d0ublc Ihc
m0ncy svcd. C0nvcrscly I Ihc nIcrcsI rIc s 9, Ihc m0unI
svcd w0uld d0ublc n 8 ycrs.
Ths rulc sys IhI m0ncy wll d0ublc n 0 ycrs I nIcrcsI
rIc s 7 pcr ccnI nd n 7 ycrs, I Ihc rIc s 0 pcr ccnI.
Hcrc, Ihcrc s n nIl dcp0sI wIh n ddI0n 0I Ixcd m0unI I Ihc cnd
0I cch pcr0d. Thc IuIurc vluc wll bc rrvcd I by Ihc usc 0I Ihc I0ll0wng
gcncrlly cccpIcd I0rmul:
m
c
rn
: lmI
+
r
m
73
( )
r
p
r
r
p
P F\
n
0 n
+ |
.
|

\
|
+ =
whcrc s Ihc rcgulr ddI0n whch s ssumcd I0 bc mdc I Ihc cnd 0I
cch pcr0d.
An nvcsI0r mdc n nIl dcp0sI 0I N50,000 I Ihc bcgnnng 0I 2007.
whlc Ihs m0unI rcmns nvcsIcd, hc plns I0 bc ddng N5,000 0n 1nury
cch subscqucnI ycr sIrIng Ir0m 1nury 2008. Assumng nIcrcsI s
c0mp0undcd cch ycr I Ihc rIc 0I 2 pcr ccnI pcr nnum, whI wll bc Ihc
vluc 0I hs nvcsImcnI 0n 1nury , 20!
SubsIIuIng vlucs I0r Ihc symb0ls nd wc hvc
( ) ( )
2 . 0
000 , 5
2 . 0
2 . 0
5000
000 , 50 F\
4
4
+ + =
= (50,000 + 4,bb7) (.2)
4
- 4,bb7
= (9,bb7 x .5735) - 4,bb7
= 44,238 - 4,bb7
= 02,57
: Ths I0rmul cn ls0 bc uscd I0 clculIc Ihc m0unI IhI s ddcd
ycrly I0 Ihc nIl dcp0sI.
!I s ll0wcd I0 bc ncgIvc, Ihc smc I0rmul cn bc uscd I0 clculIc Ihc
m0unI IhI wll bc lcII Ir0m n nIl nvcsImcnI gvcn wIhdrwl 0I rcgulr
Ixcd m0unI I Ihc cnd 0I cch pcr0d.
74
A pcns0ncr dcp0sIs N00,000 rcprcscnIng hs grIuIy n bnk cc0unI
nd wIhdrws N5,000 I Ihc cnd 0I cch ycr bcgnnng Ir0m Ihc cnd 0I
Ihc IrsI ycr. whI wll bc Ihc blncc 0I hs bnk cc0unI IIcr Ivc ycrs I
Ihc dcp0sI s nvcsIcd I 2 pcrccnI pcr nnum!
P
0
= 00,000, r = 0.2, n = 5 nd p = 5,000
( )
r
p
r
r
p
P F\
n
0 n
+ + |
.
|

\
|
=
( ) ( )
2 . 0
000 , 5
2 . 0
2 . 0
000 , 5
000 , 00 F\
5
n
+ + =
= ( 00,000 - 25,000) (.2)
5
+ 25,000
= 25,000 (.7b23) + 25,000.
= ( 44,058 + 25,000)
= 80,942.
Ths I0rmul cn ls0 bc uscd by n nnuInI I0 kn0w Ihc m0unI 0I rcgulr
nc0mc rcccvblc Ir0m n nsurncc c0mpny n c0nsdcrI0n 0I pymcnI
0I
Y0u w0n 7m Ir0m Ek0 AkcIc SIIc L0IIcry C0mpcII0n. cng uncmpl0ycd
nd 0ld, y0u wsh I0 hvc rcgulr nc0mc 0vcr Ihc ncxI Icn ycrs. Y0u hvc
bccn ppr0chcd by lIc nsurncc c0mpny IhI sclls nnuIy c0nIrcIs
nd wll py y0u Ixcd nr m0unI nnully I0r Icn ycrs. Y0ur 0pp0rIunIy
c0sI 0I Iunds s 2 pcrccnI. H0w much nnul nc0mc wll y0u bc rcccvng!
75
Usng Ihc wIhdrwl cquI0n, IuIurc vluc wll bc puI I zcr0 s Ihc Iund
wll bc Iully uIllscd.
P
0
= 7m, r s 0.2 nd n s 0. 0vcn Ihc I0rmul, wc hvc:
( ) 0
2 . 0
p
2 .
2 . 0
p
m 7
0
= + |
.
|

\
|

(7m - 8.33p) (3.058) + 8.33p = 0
(2.740bm - 25.873p + 8.33p) = 0
7.543p = 2.740bm
543 . 7
m 740b . 2
p =
= .2394m
=
Ths I0rmul cn ls0 bc uscd I0 clculIc h0w much nIl nvcsImcnI s
rcqurcd (P
0
) I0 pr0ducc gvcn cxpccIcd rcgulr nd Ixcd nnul nc0mc.
!I I s Iruc IhI m0ncy hs vluc 0vcr Imc, Ihcn I0dy s w0rIh m0rc Ihn
n ycr's Imc. Ths mcns IhI IuIurc csh Il0ws 0ccurrng I dIIcrcnI
p0nIs n Imc d0 n0I p0sscss Ihc smc vlucs rghI n0w. !n IhI csc, Ihcrc
sh0uld bc wy 0I c0nvcrIng Ih0sc IuIurc csh Il0ws I0 Ihcr prcscnI w0rIh,
Ihs pr0ccss s kn0wn s dsc0unIng, IhI s, rcvcrsng Ihc pr0ccdurc I0r
c0mp0undng.
Assumc Ixcd dcp0sI cc0unI wll py wIh ccrInIy ,200 0nc ycr
Ir0m I0dy. !I Ihc dcp0sI0r cn rcccvc 2 pcr ccnI pcr nnum Ir0m Ihc ncxI
bcsI 0pp0rIunIy, h0w much s rcqurcd n0w I0 hvc Ihc ,200!
Ths cn bc 0bIncd by rcvcrsng Ihc gcncrlscd I0rmul s I0ll0ws:
( )
n
n
0
r
F\
P
+
=
7b
( ) 2 .
200 ,
=
= 0,000.
Thc nIcrcsI rIc (I0r Ihs purp0sc) s kn0wn s dsc0unI rIc.
whcn c0mp0undng wc mkc sIcps 0vcr Imc. Thc dIIcrcncc
bcIwccn Ihc nIl m0unI nd Ihc c0mp0undcd vluc s kn0wn s
nd s n0rmlly cxprcsscd s ( + r)
n
- . whcn
dsc0unIng, wc mkc sIcps 0vcrImc. Thc dIIcrcncc bcIwccn
Ihc IuIurc vluc nd Ihc prcscnI vluc s kn0wn s
nd s n0rmlly cxprcsscd s - ( + r)
n
.
Ths s scrcs 0I m0unIs 0I m0ncy I0 bc pd 0r rcccvcd
I0r spccIcd IuIurc pcr0d 0I Imc. !I Ihc pymcnI 0r rcccpI s mdc I Ihc
0I cch ycr, I s kn0wn s . !I Ihc pymcnI 0r rcccpI
s mdc I Ihc bcgnnng 0I cch ycr, I s cllcd .
Assumc y0u Ikc up svngs pr0grmmc skng I0r dcp0sI 0I 0,000 I
Ihc 0I cch ycr I0r Ihc ncxI Ihrcc ycrs n n cc0unI pyng 2 pcrccnI
pcr nnum c0mp0undcd nnully. H0w much wll y0u hvc n Ihc cc0unI I
Ihc cnd 0I Ihc Ihrd ycr!
Thc IrsI 0,000 = 0,000(.2)
2
= 2,544
Thc scc0nd 0,000 = 0,000(.2) = ,200
Thc Ihrd 0,000 = 0,000
Thc b0vc s sIcpbysIcp ppr0ch whch lIh0ugh c0rrccI, cn bc
cumbcrs0mc nd unwcldy whcrc clculI0ns rc I0r mny ycrs. n Ihs
csc I s dvsblc I0 usc I0rmul.
77
Thc I0rmul I0r Ihc IuIurc vluc 0I n wIh0uI mndng
Is dcvcl0pmcnI, s sIIcd s I0ll0ws:
( )
(

+
=
r
r
A F\A
n
n
whcrc F\A
n
s Ihc IuIurc vluc 0I Ihc nnul rcccpI 0r pymcnI, I0r n ycrs,
A s Ihc nnul pymcnI 0r rcccpI, n s Ihc lcngIh 0I Ihc nnuIy nd r s Ihc
nIcrcsI rIc pcr nnum c0mp0undcd nnully. Y0u wll n0Icc IhI Ihs I0rmul
s 0bIncd by smply dvdng Ihc c0mp0und nIcrcsI by Ihc rIc. Applyng
Ihc I0rmul I0 Ihc b0vc, wc hvc
( )
(

=
2 . 0
2 .
000 , 0 F\A
3
n
= N
|
.
|

\
|
2 . 0
4049 .
000 , 0
|
.
|

\
|
=
2 . 0
4049 . 0
000 , 0
= N ) 3744 . 3 ( 000 , 0
= 33,744
Assumng Ihc b0vc nnul csh Il0ws 0ccur I Ihc bcgnnng 0I cch ycr.
H0w much wll y0u hvc n Ihc cc0unI I Ihc cnd 0I Ihc Ihrd ycr!
Hcrc, IuIurc vluc wll bc clculIcd by I0cusng 0n 0nc ycr IIcr Ihc lsI
csh Il0w. Thc I0rmul wll Ihus bc slghIly d|usIcd I0 rcd:
( )
( ) r
r
r
A F\A0
n
n
+
(

+
=
N
78
Usng Ihc nI0rmI0n n Ihc svngs pr0grmmc nd ssumng 0,000 s
dcp0sIcd I Ihc bcgnnng 0I cch ycr, Ihc cc0unI I Ihc cnd 0I Ihc Ihrd
ycr wll bc 33,744(.2) = 37,793. Y0u wll n0Ic IhI Ihs s smply Ihc
IuIurc vluc 0I n cquvlcnI Ihrcc ycr0rdnry nnuIy c0mp0undcd I0r
ddI0nl 0nc ycr.
AI Imcs, I my bc ncccssry I0 scI up snkng Iund I0 pr0vdc cIhcr I0r Ihc
rcplccmcnI 0I plnI I IuIurc Imc 0r I0r Ihc rcpymcnI 0I l0n whcrc
I0r cxmplc, nIcrcsI s pd pcr0dclly buI Ihc prncpl wll n0I bc duc
unIl Ihc mIurIy dIc. Sncc Ihc m0unI scI sdc cch ycr wll bc nvcsIcd
0uIsdc Ihc busncss I0 crn nIcrcsI, Ihc I0Il 0I Ihc m0unIs s0 scI sdc
cn bc lcss Ihn Ihc m0unI rcqurcd I0r Ihc sscI rcplccmcnI 0r l0n
rcpymcnI.
!I sh0uld bc n0Icd ls0 IhI Ihs I0rmul cn bc uscd I0 s0lvc Ihc Iwn pr0blcm
0I h0w much s rcqurcd I0 bc nvcsIcd cch ycr n 0rdcr I0 gvc spccIcd
I0Il sum n gvcn numbcr 0I ycrs.
A Irm plns I0 scI sdc (0uI 0I Is pr0II nd l0ss cc0unI) N500,000 I Ihc
cnd 0I cch ycr nd I0 nvcsI Ihc cquvlcnI m0unI 0uIsdc Ihc busncss.
Ths s I0 cnblc I rcplcc 0nc 0I Is pr0ducI0n mchncs n Ivc ycrs Imc.
!I Ihc nvcsImcnI s I0 crn nIcrcsI I Ihc rIc 0I 2 pcr ccnI pcr nnum, h0w
much wll bc vlblc I Ihc cnd 0I Ihc IIIh ycr I0r such rcplccmcnI!
A = 500,000, r = 0.2, n = 5
( )
(

+
=
r
r
A F\A
n
n
( )
(

=
(

+
=
2 . 0
7b23 .
000 , 500
2 . 0
2 . 0
000 , 500
5
= 500,000 X b.3525
=
79
LcI us ssumc y0u wnI I0 0pcn svngs cc0unI IhI wll gvc y0u
gurnIccd sum 0I 0,000 pcr nnum I0r Ihc ncxI Ihrcc ycrs. !I Ihc bnk
pys Is cusI0mcrs 2 pcr ccnI pcr nnum 0n svngs cc0unIs, h0w much d0
y0u hvc I0 puI nI0 Ihc cc0unI mmcdIcly s0 IhI y0u w0uld hvc n0Ihng
n Ihc cc0unI I Ihc cnd 0I Ihc Ihrd ycr!
Ths s prcscnI vluc 0I Ixcd nnul csh Il0w pr0blcm nd cn bc s0lvcd
by Ihc I0ll0wng sIcp by sIcp ppr0ch:
P\ 0I Ihc IrsI wIhdrwl =
2 .
000 , 0
= 8,928.57
P\ 0I Ihc scc0nd wIhdrwl = 2
) 2 . (
000 , 0
= 7,97.94
P\ 0I Ihc Ihrd wIhdrwl = 3
) 2 . (
000 , 0
= 7,7.94
!I Ihc m0unI rcqurcd wcrc I0 pr0ducc Ihc csh Il0w I0r
IIIy ycrs nsIcd 0I Ihrcc, Ihc pr0ccss w0uld bc Ihc smc buI Ihc clculI0ns
nccdcd w0uld bc quIc unwcldy. ThcrcI0rc I my bc ncccssry I0, wIh0uI
g0ng Ihr0ugh Is dcvcl0pmcnI, pply gcncrlscd I0rmul s I0ll0ws:
( )
(

+
=

r
r
A P\A
n
n
whcrc P\A
n
= prcscnI vluc 0I nnul rcccpI 0r pymcnI I0r ycrs
A = nnul rcccpI 0r pymcnI.
n = lcngIh 0I Ihc nnuIy
r = dsc0unI rIc pcr nnum c0mp0undcd nnully.
Usng Ihc I0rmul I0 s0lvc Ihc b0vc pr0blcm, wc wll hvc:
( )
(

=

2 . 0
2 .
000 , 0 P\A
3
3
=
(

2 . 0
78 . 0
000 , 0
80
=
(

2 . 0
2882 . 0
000 , 0
= 0,000 (2.407)
= 24,07
Thc prcscnI vluc 0I n nnuIy duc I0r 'n' ycrs wll bc cqul I0 Ihc dsc0unIcd
(prcscnI) vluc 0I n ycr 0rdnry nnuIy plus Ihc IrsI ycr csh Il0w
whch wll n0I bc dsc0unIcd bccusc I 0ccurs I Ihc bcgnnng 0I Ihc ycr
IhI s cnd 0I ycr zcr0. Ths cn bc rcprcscnIcd by Ihc I0ll0wng I0rmul:
( )
( )
(

+
+ =

r
r
A A P\A0
n
n
Usng Ihc I0rmul I0 s0lvc Ihc pr0blcm 0n pgc 3 wc w0uld hvc:
P\A0
n =
0,000 + 0,000
( )
(

2 . 0
2 .
2
0,000 + 0,000
|
.
|

\
|
2 . 0
2028 . 0
= 0,000 + b,000
=
A g00d pplcI0n 0I prcscnI vlucs prncplc 0ccurs whcn l0n s grnIcd
by bnk nd rcpymcnI hs I0 bc n scrcs 0I cqul pcr0dc nsIlmcnIs
wIh cch nsIlmcnI c0mprsng b0Ih nIcrcsI nd prncpl clcmcnIs.
8
Assumc Mllm 1nn Kurw bnk lcnds y0u Nm I0r pcr0d 0I Ivc
ycrs I 5 pcrccnI nIcrcsI pcr nnum I0 bc c0mp0undcd nnully.
RcpymcnI I0 bc I Ihc cnd 0I cch ycr. T0 Iully rcc0vcr I0r Ihc lcndcr b0Ih
prncpl nd nIcrcsI scI up l0n m0rIsI0n Iblc.
Thc IrsI sIcp s I0 dcIcrmnc Ihc m0unI 0I cch nsIlmcnI usng Ihc I0rmul
0I prcscnI vluc 0I n 0rdnry nnuIy:
( )
A 352 . 3 000 , 000 ,
5 . 0
5028 . 0
A 000 , 000 ,
5 . 0
5 .
A P\A
r
) r (
A P\A
5
n
n
n
=
(

=
(

=
(

+
=

298,329 = A
Thc scc0nd sIcp s c0nsIrucI0n 0I Ihc Iblc.
Ycr cgnnng Annul Annul Prncpl Endng
L0n bl. nsIll. !nIcrcsI RcpymcnI l0n bl.
,000,000 298,329 50,000 48,329 85,b7
2 85,b7 298,329 27,75 70,578 b8,093
3 b8,093 298,329 02,b4 9b,b5 484,928
4 484,928 298,329 72,739 225,590 259,338
5 259,338 298,329 38,90 259,428 (90)
NNNNNNNNNN
NNNNNNNNNN
82
() Thc nnul nIcrcsI I0r cch ycr s bscd 0n Ihc m0unI 0I prncpl
0uIsIndng I Ihc bcgnnng 0I cch ycr, nd
() !nIcrcsI chrgcd s rcducng 0vcr Imc whlc Ihc prncpl s ncrcsng
0vcr Imc. Ths s I0 rcIlccI Ihc IcI IhI nIcrcsI s bscd 0n Ihc rcducng
blncc 0I Ihc prncpl.
Ths s n 0rdnry nnuIy wh0sc scrcs 0I csh Il0ws c0nInuc s0 l0ng IhI
n cnd s n0I n sghI. !n Ihs csc, 'n' s rcgrdcd I0 bc Icndng I0 nInIy.
L00kng I Ihc prcscnI vluc 0I n 0rdnry nnuIy I0rmul, Ihc Icrm ( +
r)
n
s lcss Ihn nnuIy nd wll, IhcrcI0rc, Icnd I0 zcr0 s 'n' Icnds I0 nInIy.
wc wll, IhcrcI0rc, hvc n Ihs sIuI0n Ihc I0ll0wng I0rmul:
r
A
r
0
A P\A
=
(

ThcrcI0rc, Ihc prcscnI vluc 0I pcrpcIul (cIcrnl) nnuIy s smply Ihc

nnul csh Il0w dvdcd by Ihc nIcrcsI rIc pcr nnum.
!I mn s pr0mscd Ihc sum 0I 0,000 pcr nnum ndcInIcly I n nIcrcsI
rIc 0I 2 pcrccnI pcr nnum, whI wll bc Ihc prcscnI vluc 0I Ihs pcrpcIul
nnuIy!
Usng Ihc b0vc I0rmul, Ihc prcscnI vluc wll bc:
2 . 0
000 , 0
r
A
= =
83.333
Thcsc rc csh Il0ws IhI d0 n0I 0ccur cIhcr sIrcIly s lump sums 0r sIrcIly
s nnuIcs. Thcr pIIcrns rc rrcgulr. Thc pr0blcms p0scd by Ihcr Imngs
wll bc IrcIcd lIcr undcr Tcchnqucs 0I nvcsImcnI pprsl.
83
8.8.
AI Imcs, Ihc rIc 0I nIcrcsI (dsc0unI) my bc Ihc 0nly unkn0wn
vrblc n Iypcl nvcsImcnI pr0blcm nd Ihs rIc nccds I0 bc
I0und.
An nvcsImcnI 0I N20,000 (n0w) s cxpccIcd I0 ycld N80,000 n 5
ycrs Imc. whI s Ihc mprnIcd c0mp0und nIcrcsI rIc!
Usng Ihc I0rmul:
( ) r P F\S
0 5
+ =
wc hvc:
N20,000 ( + r)
5
= N80,000
( + r)
5
= 4
+ r = 4
0.20
0r
5
4
+ r = .395
r = .395 -
= 3.95
8.8.2
!I my bc ncccssry I0 kn0w h0w l0ng I wll Ikc n nvcsImcnI I0
gr0w gvcn Ihc nIl m0unI, Is IuIurc vluc nd Ihc c0mp0und rIc
0I nIcrcsI.
84
H0w l0ng wll I Ikc dcp0sI 0I N0,000 I0 gr0w I0 N50,000 gvcn
n nnul nIcrcsI rIc 0I 8 pcrccnI c0mp0undcd nnully!
Ths wll bc s0lvcd s I0ll0ws:
N0,000 ( + r)
n
= N50,000
( + 0.08)
n
=

=
Usng Ihc nIurl l0grIhm ppr0ch, wc hvc
n l0g (.08) = l0g 5
n =
08 . l0g
5 l0g
= 20.924
= 2 ycrs.
Scrchng I0r mpuIcd nIcrcsI rIc n nnul csh Il0ws (rcgulr nd
rrcgulr) sIuI0n nv0lvcs Irl nd crr0r pr0ccss pIIcrns wIh Ihc cxcI
rIc bcng c0mpuIcd Ihr0ugh lncr nIcrp0lI0n. Ths wll bc dclI wIh
lIcr undcr !nIcrnl RIc 0I RcIurn (!RR).
C0mp0und nIcrcsI nd dsc0unI I0rmulc rc mp0rInI mIhcmIcl I00ls
I0r Inncl nlyss. Thcr usc cnblc IuIurc vlucs 0I lump sums nd
nnuIcs I0 bc clculIcd. Als0 prcscnI vlucs 0I IuIurc lump sums nd
nnuIcs cn bc c0mpuIcd.
Thcsc clculI0ns sssI Inncl mngcrs n cpIl nvcsImcnI dccs0ns.
usncss Irms nvcsI n0w n cpIl pr0|ccIs wh0sc csh Il0ws 0ccur nI0 Ihc
IuIurc. 0nc nccds I0 kn0w Ihc prcscnI w0rIh 0I Ihcsc csh Il0ws, c0mprc
wIh Ihc nIl m0unI IhI wll bc nvcsIcd n0w, bcI0rc Ikng dccs0n
whcIhcr 0r n0I I0 nvcsI.
N
N
85
8.20.
. whI s Ihc mcnng 0I Ihc Icrm Imc vluc 0I m0ncy!
A Tmc hs vluc 0vcr m0ncy
An m0unI 0I m0ncy n IuIurc, hs grcIcr vluc Ihn Ihc smc
m0unI n0w
C An m0unI 0I m0ncy n0w, hs grcIcr vluc Ihn n m0unI 0I
m0ncy n IuIurc
0 An m0unI 0I m0ncy n IuIurc, hs lcss vluc Ihn n m0unI 0I
m0ncy n0w
E An m0unI 0I m0ncy n0w hs grcIcr vluc Ihn Ihc smc m0unI
n IuIurc.
2. Mr. 0 hs |usI nhcrIcd N500,000 Ir0m hs lIc IIhcr's csIIc. H0w much
m0ncy wll hc hvc I Ihc cnd 0I Icn ycrs I hc nvcsIs I I 8 pcrccnI pcr
nnum c0mp0undcd nnully!
A N23,500
N,079,4b2
C N540,000
0 Nb2,500
E N4,000,000
3. Mrs. F. hs m0rIggc l0n wIh Svngs nd L0ns Inncl nsIIuI0n.
Thc unpd m0rIggc 0n Ihc h0usc n Icn ycrs Imc wll bc N895,500.
H0w much d0cs shc hvc I0 nvcsI nnully I 8 pcrccnI pcr nnum I0
hvc |usI Ihs m0unI 0n hnd I Ihc cnd 0I Ihc IcnIh ycr!
A Nb,84
N,938
C N89,550
0 N72,4b0
E N58,85
4. 10hn, cvl scrvnI, hs csImIcd IhI I0r Ihc IrsI Icn ycrs IIcr hc
rcIrcs, hc wll nccd n nnul nc0mc 0I N27,200. H0w much m0ncy
musI hc nvcsI I 8 pcrccnI pcr nnum I gc b5 (rcIrcmcnI gc) I0
rclsc Ihs nnul nc0mc!
A N80,902
N28,7b2
C N82,52
0 N94,758
E N8,480
5. X wnIs I0 nvcsI Nm n0w I 8 pcrccnI pcr nnum c0mp0undcd nnully..
Hc wnIs Ihs m0unI I0 bcc0mc N2m. Appr0xmIcly, h0w l0ng wll Ihc
nvcsImcnI Ikc I0r hm I0 rclsc Ihs m0unI!
A 7 ycrs
8b
8 ycrs
C 0 ycrs
0 ycrs
E 9 ycrs
Usc Ihs nI0rmI0n I0 nswcr qucsI0ns & 2.
A c0mpny nIcnds I0 scI sdc (0uI 0I Is pr0IIs) sum 0I N5m I Ihc cnd 0I cch
ycr nd I0 nvcsI Ihc cquvlcnI m0unI 0uIsdc Ihc busncss. Ths s I0 cnblc
I rcplcc 0nc 0I Is 0ld mchncs wIh n uI0mIcd sIIc0IIhcrI cqupmcnI
n Ivc ycrs Imc. Thc nvcsImcnI s I0 crn nIcrcsI I 8 pcrccnI pcr nnum.
. whI s Ihc nmc gvcn I0 Ihs Inncl pr0grmmc!
2. H0w much wll bc vlblc I Ihc cnd 0I Ihc IIIh ycr I0r Ihc rcplccmcnI!
Usc Ihc I0ll0wng nI0rmI0n I0 nswcr qucsI0ns 3 & 4
Mr. bl0dc plns I0 cqurc cr undcr hrc purchsc grccmcnI. Thc c0sI 0I
Ihc cr s N2m pyblc 0vcr 3 ycrs n Ihrcc cqul nnul nsIlmcnIs. Thc IrsI
nsIlmcnI wll sIrI I Ihc bcgnnng 0I Ihc ycr wIh subscqucnI nsIlmcnIs 0n
Ihc nnvcrsry 0I Ihs dIc, IhI s cvcry 1nury . PrcscnIly m0ncy cn bc
nvcsIcd I 8 pcrccnI pcr nnum.
3. Ths scrcs 0I pymcnI s cllcd _________________
4. H0w much d0cs Mr. bl0dc nccd I0 py cvcry ycr s nsIlmcnI!
5. SIIc Ihc sgnIcncc 0I prcscnI vluc ppr0ch I0 Inncl dccs0n
mkng.
87
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ Kn0w Ihc mp0rIncc 0I cpIl cxpcndIurc I0 Ihc c0mpny,
+ SIIc nd cxpln Ihc sIgcs nv0lvcd n cpIl cxpcndIurc plnnng nd c0nIr0l,
+ Kn0w Ihc bcncIIs 0I cpIl cxpcndIurc plnnng,
+ !dcnIIy Ihc cpIl nvcsImcnI pprsl Icchnqucs vlblc I0 c0mpny,
+ Apprsc Iypcl pr0|ccI usng ppr0prIc Icchnquc, nd
+ Advsc 0n Ihc sclccI0n 0I suIblc pr0|ccI bscd 0n grccd dccs0n crIcr0n.
0ccs0ns rcgrdng cqusI0n 0I Ixcd sscIs nd 0Ihcr l0ngIcrm pr0|ccIs
0I Ihc c0mpny rc crIcl I0 Ihc IuIurc pr0IIblIy nd succcss 0I Ihc
c0mpny. Such nvcsImcnI ncludcs purchsc 0I cqupmcnI, cqusI0n 0I
lnd nd buldngs, nIr0ducI0n 0I ncw pr0ducIs nd s0 0n.
Thcrc rc cscs whcn Ihc cqupmcnI mkcs Ihc busncss, I0r cxmplc, Ihc
rcrII nd Ihc shp rc Ihc bckb0nc 0I n rlnc nd shppng c0mpny,
rcspccIvcly. Thc mp0rI 0I Ihc b0vc s IhI cxpcndIurc 0n Ihcm hvc I0 bc
pr0pcrly plnncd nd cvluIcd bcI0rc c0mpny c0mmIs Iunds nI0 Ihcm.
Thc mp0rIncc 0I cpIl nvcsImcnIs ls0 lc n Ihc IcI IhI lrgc sums 0I
m0ncy rc n0rmlly sunk nI0 Ihcsc nvcsImcnIs nd 0ncc dccs0ns 0n Ihcm
rc mdc, Ihcy rc ncrly lwys rrcIrcvblc. whcrcs Ihc rcIurns 0n Ihcsc
nvcsImcnIs g0 nI0 Ihc IuIurc nd my bc hghly unccrIn n s0mc cscs,
Ihc cxpcndIurc 0n Ihcm s n0w.
Thc IuIurc csh Il0ws hvc I0 bc pr0pcrly csImIcd nd Ihs s Ihc m0sI
dIIculI spccI 0I Ihc plnnng nd cvluI0n pr0ccss. Thc c0mpny, hvng
csImIcd Ihc IuIurc csh Il0ws 0I cch cpIl nvcsImcnI vlblc, wll
cvluIc cch nvcsImcnI pr0p0sl usng Ihc ppr0prIc pprsl
Icchnquc(s). Ech nvcsImcnI pr0p0sl sh0uld bc sscsscd 0n Ihc bss 0I
Is blIy I0 chcvc Ihc mnmum cxpccIcd rcIurn by Ihc pr0vdcrs 0I Ihc
Iunds IhI wll bc chnnclcd I0 IhI pr0p0sl.
Ths mnmum rcIurn wll bc ssumcd I0 rcmn unchngcd nd bc Ihc smc
I0r ll nvcsImcnI 0pp0rIunIcs. !n 0Ihcr w0rds, Ihc cccpIncc 0I pr0|ccI
wll n0I chngc Ihc busncss pr0Ilc 0I Ihc c0mpny s pcrccvcd by nvcsI0rs.
Rsk s IhcrcI0rc hcld c0nsInI.
88
Pndcy (989) dcIncd cpIl cxpcndIurc plnnng nd c0nIr0l s pr0ccss
0I IclIIng dccs0ns c0vcrng cxpcndIurc 0n l0ngIcrm sscIs.
An0Ihcr sch00l 0I Ih0ughI hghlghIs IhI CpIl cxpcndIurc ncludcs ll
cxpcndIurc, 0n Ingblc nd n s0mc cscs nIngblc sscIs, whch rc
cxpccIcd I0 pr0ducc bcncIIs I0 Ihc Irm 0vcr pcr0d 0I Imc (n0I lcss IhI
0nc ycr).
CpIl cxpcndIurc plnnng nd c0nIr0l s n nIcgrl prI 0I Ihc c0rp0rIc
pln 0I n 0rgnsI0n.
Thc cpIl budgcIng pr0ccss ncludcs:
() dcnIIcI0n,
(b) dcvcl0pmcnI,
(c) cvluI0n,
(d) uIh0rsI0n, nd
(c) c0nIr0l.
()
!dcnIIcI0n 0I nvcsImcnI pr0p0sls s Ihc m0sI crIcl spccI 0I
Ihc nvcsImcnI pr0ccss nd sh0uld bc gudcd by Ihc 0vcrll sIrIcgc
c0nsdcrI0ns 0I Irm. 0ncc Ihc nvcsImcnI pr0p0sl hs bccn
dcnIIcd, cch p0IcnIl dc sh0uld bc dcvcl0pcd nI0 pr0|ccI nd
submIIcd I0r pprsl I0 dcIcrmnc Is vblIy nd w0rIhncss. A
s0und pprsl Icchnquc whch sh0uld mxmsc Ihc shrch0ldcrs
wclIh sh0uld bc uscd I0 mcsurc Ihc cc0n0mc w0rIh 0I Ihc pr0|ccIs.
!n Ihs rcspccI, Ihcrc w0uld bc nccd I0 c0nsdcr ll csh Il0ws, I0
dcIcrmnc Ihc Iruc pr0IIblIy 0I Ihc pr0|ccI. Ths wll nv0lvc Ihc
dcvcl0pmcnI 0I csh Il0w csImIcs.
(b)
EsImI0n 0I csh Il0ws s dIIculI Isk bccusc Ihc IuIurc s
unccrIn. ThcrcI0rc, Ihc rsk ss0cIcd wIh csh Il0ws sh0uld bc
hndlcd pr0pcrly nd Ikcn nI0 cc0unI n Ihc dccs0n pr0ccss s
89
Ihc csImI0n 0I csh Il0ws rcqurcs c0llccI0n nd nlyss 0I ll
qunIIIvc nd qulIIvc dI. Thc ncxI pr0ccss s Ihc cvluI0n
0I Ihc ncI bcncIIs.
(c)
!n sclccIng mcIh0d 0r mcIh0ds 0I nvcsImcnI cvluI0n, c0mpny
sh0uld Ikc dcquIc crc I0 cnsurc IhI Ihc crIcr sclccIcd w0uld
lcd, I0 Ihc ncI ncrcsc n Ihc c0mpny's wclIh, IhI s, Is bcncII
cxcccds Is c0sI d|usIcd I0r Imc vluc nd rsk. Thc cvluI0n
crIcr sh0uld ls0 n0I dscrmnIc bcIwccn Ihc nvcsImcnI pr0p0sls.
whIcvcr crIcr0n IhI s pplcd, I sh0uld bc cpblc 0I rnkng
pr0|ccIs c0rrccIly n Icrms 0I pr0IIblIy.
!n Ihs prIculr csc, Ihc ncI prcscnI vluc mcIh0d s Ihc0rcIclly
rcc0mmcndcd, m0ng 0Ihcrs by cxpcrIs s I hs Iruc mcsurc 0I
pr0IIblIy. !I rnks pr0|ccIs c0rrccIly nd s c0nssIcnI wIh Ihc wclIh
mxmsI0n crIcr0n. H0wcvcr, 0Ihcr mcIh0ds n usc prI Ir0m Ihc
NP\ rc Ihc pybck pcr0d, Ihc nIcrnl rIc 0I rcIurn (!RR), cc0unIng
rIc 0I rcIurn (ARR) nd pr0IIblIy ndcx (P!).
!n Ihc mplcmcnII0n 0I s0phsIcIcd cvluI0n sysIcm, Ihc usc
0I mnmum rcqurcd rIc 0I rcIurn s ncccssry. Ths sh0uld bc bscd
0n Ihc rskncss 0I csh Il0ws 0I Ihc nvcsImcnI pr0p0sl whch rc
c0nsdcrcd I0 bc n0rmlly nIlucnccd by Ihc I0ll0wng IcI0rs, m0ngsI
0Ihcrs:
() Prcc 0I rw mIcrls nd 0Ihcr npuIs,
() Prcc 0I pr0ducIs (scllng prcc),
() Pr0ducI dcmnd,
(v) 00vcrnmcnI p0lccs,
(v) Tcchn0l0gcl chngcs,
(v) Pr0|ccI lIc, nd
(v) !nIlI0n.
!n Ihc0ry, numbcr 0I Icchnqucs rc suggcsIcd I0 hndlc rsk. S0mc
0I Ihcsc ncludc: smulI0n Icchnqucs, scnsIvIy nlyss,
c0nscrvIvc I0rccsIs, sIndrd dcvI0n, c0cIIccnI 0I vrI0n nd
dccs0n Irccs.
90
(d)
Thcrc s n0 spccIc sIndrd dmnsIrI0n pr0ccdurc I0r ppr0vng
nvcsImcnI pr0p0sl s I dIIcrs Ir0m 0nc c0mpny I0 n0Ihcr.
H0wcvcr, whcn lrgc sums 0I cpIl cxpcndIurc s nv0lvcd, Ihc
uIh0rIy I0r Ihc Inl ppr0vl my rcsI wIh Ihc 0rd 0r Ihc I0p
mngcmcnI whch my bc Ihc ChcI ExccuIvc 0I Ihc c0mpny. Thc
ppr0vl uIh0rIy my bc dclcgIcd I0 Ihc |un0r mngcmcnI I0r
ccrIn Iypcs 0I nvcsImcnI pr0|ccI nv0lvng smll m0unIs. Funds
rc usully ppr0prIcd I0r cpIl cxpcndIurc Ir0m Ihc cpIl
budgcI IIcr Ihc Inl sclccI0n 0I nvcsImcnI pr0p0sls. Mcnwhlc
I0p mngcmcnI rc I0 cnsurc IhI Iunds rc spcnI n cc0rdncc
wIh ppr0prI0ns mdc n Ihc cpIl budgcI.
Funds I0r Ihc purp0sc 0I pr0|ccI mplcmcnII0n sh0uld bc spcnI 0nly
IIcr ppr0vl hs bccn grnIcd by Ihc Inncc mngcr 0r ny 0Ihcr
uIh0rscd pcrs0n.
(c)
A cpIl pr0|ccI rcp0rIng sysIcm s rcqurcd I0 rcvcw nd m0nI0r
Ihc pcrI0rmncc 0I nvcsImcnI pr0|ccIs durng nd IIcr c0mplcI0n.
Ths wll mcn c0mprng Ihc cIul pcrI0rmncc wIh 0rgnl
csImIcs. !I wll rcqurc rcgulr rcp0rIng cIhcr m0nIhly, qurIcrly
0r hlIycrly.
Thc cvluI0n rcp0rIs my m0ng 0Ihcrs ncludc nI0rmI0n 0n
cxpcndIurc I0 dIc, sIgc 0I physcl c0mplcI0n nd ppr0vcd nd
rcvscd I0Il c0sI. Thc rcpprsl my ls0 ncludc c0nsdcrI0n 0I
Ihc c0mprs0n bcIwccn cIul nd I0rccsI cpIl c0sI svngs nd
rIc 0I rcIurn. Thc pcrccvcd dvnIgcs 0I rcpprsl rc:
() !mpr0vcmcnI n pr0IIblIy by p0sI0nng Ihc pr0|ccI s pcr
Ihc 0rgnl pln,
() AsccrInmcnI 0I crr0rs n nvcsImcnI plnnng whch cn bc
v0dcd n IuIurc,
() 0udncc I0r IuIurc cvluI0n 0I pr0|ccIs, nd
(v) 0cncrI0n 0I c0sI c0nsc0usncss m0ng Ihc pr0|ccI Icm.
!nvcsImcnI dccs0ns IIccI Ihc vluc 0I Ihc Irm nd Ihs wll ncrcsc, I
nvcsImcnIs rc pr0IIblc nd dd I0 shrch0ldcrs' wclIh. !I s, IhcrcI0rc,
mp0rInI I0 cnsurc IhI nvcsImcnIs rc cvluIcd 0n Ihc bss 0I crIcr
9
whch rc c0mpIblc wIh Ihc 0b|ccIvc 0I Ihc shrch0ldcrs' wclIh
mxmsI0n.
!n Ihs rcspccI, I s ncccssry I0 cxmnc Ihc dIIcrcnI mcIh0ds 0I sclccIng
nvcsImcnI n l0ngIcrm sscIs, IhI s, cpIl cxpcndIurc, I0 bc blc I0
dcIcrmnc Ihc m0sI vld Icchnquc 0I cvluIng n nvcsImcnI pr0|ccI.
A numbcr 0I cpIl budgcIng Icchnqucs rc uscd n prcIcc. Thcy rc
gr0upcd nI0 Iw0 m|0r cIcg0rcs:
.
Thcsc ncludc:
() NcI prcscnI vluc (NP\),
(b) !nIcrnl rIc 0I rcIurn (!RR),
(c) Pr0IIblIy ndcx (P!), nd
(d) 0sc0unIcd pybck pcr0d.
2.
Thcsc ncludc:
() Pybck pcr0d (P), nd
(b) Acc0unIng rIc 0I rcIurn (ARR)
!n cvluIng n nvcsImcnI, Ihrcc sIcps rc nv0lvcd, Ihcsc rc:
() EsImI0n 0I csh Il0ws,
(b) EsImI0n 0I Ihc rcqurcd rIc 0I rcIurn (0pp0rIunIy c0sI 0I cpIl),
nd
(c) ApplcI0n 0I dccs0n rulc I0r mkng Ihc ch0cc
!I s mp0rInI I0 cmphssc IhI cxpcndIurc 0n nd bcncIIs 0I n nvcsImcnI
sh0uld bc mcsurcd n csh. !n Ihs rcspccI, I s Ihc csh Il0w IhI s mp0rInI
nd n0I Ihc cc0unIng pr0II.
H0wcvcr, I s ssumcd IhI Ihc cpIl pr0|ccIs' 0pp0rIunIy c0sI 0I cpIl
(rIc 0I rcIurn) s kn0wn. !I s ls0 ssumcd IhI Ihc cxpcndIurc nd bcncIIs
0I Ihc nvcsImcnI rc kn0wn wIh ccrInIy.
92
9.3.
Ths Icchnquc sh0ws Ihc numbcr 0I ycrs 0vcr whch
Ihc nvcsImcnI w0uld bc rcc0vcrcd n currcnI nr
vluc. C!MA dcIncs pybck s Ihc pcr0d usully
cxprcsscd n ycrs, n whch Ihc csh 0uIIl0ws wll
cquIc Ihc csh nIl0ws Ir0m pr0|ccI. Ths Icchnquc
mcsurcs pr0|ccIs 0n Ihc bss 0I Ihc pcr0d 0vcr whch
Ihc nvcsImcnI pys bck IsclI 0r Ihc pcr0d 0I rcc0vcry
0I Ihc nIl nvcsImcnI. Ths mcns IhI Ihc Iull
rcc0vcry 0I Ihc pr0|ccIs csh 0uIIl0w w0uld bc mcsurcd
Ihr0ugh Ihc csh nIl0ws.
Ths mcIh0d pys IIcnI0n I0 Ihc sh0rIncss 0I Ihc pr0|ccI,
IhI s, Ihc sh0rIcr Ihc pcr0d 0I rcc0vcry 0I nIl
nvcsImcnI 0r cpIl 0uIly, Ihc m0rc cccpIblc Ihc
pr0|ccI bcc0mcs.
whcrc Ihcrc s c0nsInI 0r unI0rm nnul ncI csh Il0ws
Ir0m pr0|ccI, Ihc pybck pcr0d s clculIcd Ihus:
Il0w Csh NcI Annul
) 0uIly CpIl ( !nvcsImcnI !nIl
Pcr0d Pybck =
!I Ihc pybck pcr0d clculIcd I0r pr0|ccI s lcss Ihn
Ihc mxmum 0r sIndrd pybck pcr0d scI by
mngcmcnI, I w0uld bc cccpIcd, I n0I, I w0uld bc
rc|ccIcd.
!I Ihc Irm hs I0 ch00sc m0ng Iw0 muIully cxclusvc
pr0|ccIs Ihc pr0|ccI wIh sh0rIcr pybck pcr0d wll bc
sclccIcd.
() !I s smplc I0 clculIc nd bcIIcr undcrsI00d 0I
ll Ihc mcIh0ds 0I cpIl budgcIng.
() !I lcsI cxp0scs Ihc Irm I0 Ihc pr0blcm 0I
unccrInIy sncc I I0cuscs 0n sh0rIncss 0I pr0|ccI
I0 py bck Ihc nIl 0uIly.
93
() !I s IsI scrccnng Icchnquc cspcclly I0r Ihc
Irms IhI hvc lqudIy pr0blcms.
() !I d0cs n0I Ikc cc0unI 0I Ihc csh nIl0ws crncd
IIcr Ihc pybck pcr0d.
() !I d0cs n0I Ikc nI0 cc0unI Ihc Imc vluc 0I
m0ncy.
() !I d0cs n0I Ikc nI0 cc0unI Ihc rsks ss0cIcd
wIh cch pr0|ccI nd Ihc IIIudc 0I Ihc c0mpny
I0 rsk.
0AAP LId, mnuIcIurng c0mpny, s Iccd wIh Ihc pr0blcm 0I ch00sng
bcIwccn Iw0 muIully cxclusvc pr0|ccIs.
Pr0|ccI A rcqurcs csh 0uIly 0I N250,000 nd gcncrIcs ncI csh Il0w
0I N00,000 pcr ycr I0r 4 ycrs.
Pr0|ccI c0sIs N50,000 nd s cxpccIcd I0 gcncrIc ncI csh Il0w 0I Nb5,000
N55,000, N40,000 nd N50,000 0vcr Is lIc 0I 4 ycrs. !I Ihc mngcmcnI
0I Ihc c0mpny hd scI Ihc mxmum cccpIblc pcr0d 0I 2 ycrs, whch
0I Ihc pr0|ccIs sh0uld bc cmbrkcd up0n!
CshIl0w NcI Annul
0uIly CpIl !nIl
Pcr0d Pybck =
Ycrs
2

2
000 , 00
000 , 250
= =
0 (50,000) (50,000)
b5,000 (85,000)
N
N
94
2 55,000 (30,000)
3 40,000 0,000
4 50,000 b0,000
Pybck pcr0d = 2yrs +
000 , 40
000 , 30
x 2 n m0nIhs
= 2yrs 9 m0nIhs
Sncc Ihc mxmum cccpIblc pcr0d scI by Ihc mngcmcnI s
2 ycrs, 0nly pr0|ccI A mccIs Ihc cccpIncc crIcr nd sh0uld bc cccpIcd
whlc pr0|ccI sh0uld bc rc|ccIcd.
Thc cc0unIng rIc 0I rcIurn (ARR) Icchnquc s dcrvcd Ir0m
Ihc c0nccpI 0I rcIurn 0n cpIl cmpl0ycd (R0CE) whch s ls0
kn0wn s rcIurn 0n nvcsImcnI (R0!). !I uscs cc0unIng
nI0rmI0n pr0vdcd by Ihc Inncl sIIcmcnIs I0 mcsurc
Ihc pr0IIblIy 0I n nvcsImcnI. !I s clculIcd by dvdng
Ihc vcrgc IIcrIx pr0II by Ihc vcrgc b00k vluc 0I Ihc
nvcsImcnI durng Is lIc. Thc I0rmulc s:

00
x
!nvcsImcnI Avcrgc
!nc0mc Avcrgc
ARR =
Thc rulc s I0 nvcsI n ll pr0|ccIs wh0sc cc0unIng rIc 0I
rcIurn (ARR) rc hghcr Ihn Ihc c0mpny's prcdcIcrmncd
mnmum cccpIblc rIc.
whcrc muIully cxclusvc pr0|ccIs rc c0nccrncd, Ihc rulc s I0
cccpI Ihc pr0|ccI wIh Ihc hghcsI ARR.
() !I s csy I0 clculIc.
() !I s smplc I0 undcrsInd nd usc.
() !I nc0rp0rIcs Ihc cnIrc sIrcm 0I nc0mc n clculIng
Ihc pr0|ccI's pr0IIblIy.
95
() !I uscs cc0unIng pr0IIs n pprsng Ihc pr0|ccIs.
() Thc vcrgng 0I nc0mc gn0rcs Ihc Imc vluc 0I m0ncy.
() !I uscs n rbIrry cuI 0II yrdsIck.
(v) !I s n vcrgc c0nccpI nd s such wll hdc Ihc szcs
nd Imng 0I Ihc ndvdul csh Il0ws.
(v) !I d0cs n0I Ikc nI0 c0nsdcrI0n Ihc rsk ss0cIcd
wIh cch pr0|ccI s wcll s Ihc IIIudc 0I Ihc
mngcmcnI I0 rsk.
(v) Thcrc s n0 unquc dcInI0n I0r ARR. F0r nsIncc
"vcrgc pr0II" my bc pr0IIs IIcr dcprccI0n, nIcrcsI
nd bcI0rc Ix 0r pr0IIs IIcr dcprccI0n, nIcrcsI nd
Ix whch s d0pIcd n Ihc llusIrI0n 92. !nIl
nvcsImcnI c0uld bc nIl nvcsImcnI plus scrp vluc
0r |usI nIl nvcsImcnI whch s d0pIcd n Ihc
llusIrI0n 92.
Alh| Um0ru nvcsIcd Ihc sum 0I 800,000 n p0ulIry pr0|ccI. Hc csImIcs
IhI Ihc pr0|ccI wll ycld Ihc I0ll0wng IIcr Ix rcIurns nnully I0r Ihc ncxI
Ivc ycrs, vz 20,000, 40,000, b0,000, 80,000 nd 20,000
rcspccIvcly. Thc p0ulIry h0usc s cxpccIcd I0 bc dcprccIcd 0n sIrghI
lnc bss.
Pr0vdc Ihc cc0unIng rIc 0I rcIurn 0I Ihs pr0|ccI.
Ycr 2 3 4 5
Ernngs N N N N N N
AIIcr Ix 20,000 40,000 b0,000 80,000 20,000 b4,000
00k \luc
0I nvcsImcnI
9b
cgnnng () 800,000 b40,000 480,000 320,000 b0,000
0cprccI0n (b0,000) (b0,000) (b0,000) (b0,000) (b0,000)
End (b) b40,000 480,000 320,000 b0,000
|
.
|

\
| +
2
b
720,000 5b0,000 400,000 240,000 80,000 400,000
Acc0unIng RIc 0I RcIurn

00
x
400,000
b4,000
=
=
9.3.2
NcI prcscnI vluc (NP\) s 0nc 0I Ihc dsc0unIcd csh
Il0w (0CF) Icchnqucs IhI rcc0gnscs Ihc Imc vluc 0I
m0ncy. !I s Ihc ncI c0nIrbuI0n 0I pr0|ccI I0 Is 0wncrs
wclIh, IhI s, Ihc prcscnI vluc 0I IuIurc csh Il0ws
mnus Ihc prcscnI vluc 0I nIl cpIl nvcsImcnI.
wIh Ihc prcscnI vluc mcIh0d, ll csh Il0ws rc
dsc0unIcd I0 Ihcr prcscnI vlucs usng Ihc rcqurcd
rIc 0I rcIurn. Thc I0rmul I0r clculIng NP\ cn bc
wrIIcn s I0ll0ws:
( )
( ) ( ) ( )
0
n
n
3
3
2
2
C
r
C
.........
r
C
r
C
r
C
NP\
(

+
+
+
+
+
+
+
=
0R
( )

=

+
=
n
I
0
I
I
C
r
C
NP\
whcrc:
C

, C
2
. rcprcscnI csh nIl0ws n ycr , 2 ... n
r rcprcscnIs Ihc 0pp0rIunIy c0sI 0I cpIl
C
0
s Ihc nIl c0sI 0I Ihc nvcsImcnI
n s Ihc cxpccIcd lIc 0I Ihc nvcsImcnI nd
I= up I0 nd ncludc I=n
N
N
97
A mchnc c0sIng 200,000 wll pr0vdc n nnul ncI csh nIl0w 0I
Nb0,000 I0r sx ycrs I c0sI 0I cpIl 0I 0 pcrccnI.
. ClculIc Ihc ncI prcscnI vluc (NP\) 0I Ihc mchnc.
. Sh0uld Ihc mchnc bc purchscd!
() Ycr Csh Il0ws 0CF P\
@ 0
0 (200,000) .000 (200,000)
b0,000 0.909 54,540
2 b0,000 0.82b 49,5b0
3 b0,000 0.75 45,0b0
4 b0,000 0.b83 40,980
5 b0,000 0.b2 37,2b0
b b0,000 0.5b4 33,840
() 0ccs0n: Thc mchnc sh0uld bc purchscd sncc Ihc NP\ s p0sIvc,
IhI s NP\>0.
AcccpI ll pr0|ccIs IhI pr0ducc p0sIvc ncI prcscnI vluc (NP\)
AcccpI I NP\ > 0
Rc|ccI I NP\ < 0
My cccpI 0r rc|ccI I NP\ = 0
!I muIully cxclusvc pr0|ccIs rc nv0lvcd, Ihc rulc s I0 cccpI Ihc pr0|ccI
IhI pr0duccs Ihc hghcsI p0sIvc ncI prcscnI vluc.
() !I rcc0gnscs Ihc Imc vluc 0I m0ncy,
() !I uscs ll csh Il0ws 0ccurrng 0vcr Ihc cnIrc
lIc 0I Ihc pr0|ccI,
() !I mcsurcs n bs0luIc Icrms (Nr vluc) Ihc
ncrcsc n Ihc wclIh 0I Ihc shrch0ldcrs, nd
98
(v) !I IclIIcs mcsurng 0I csh Il0ws n Icrms 0I
prcscnI vlucs. Ths mplcs IhI I Ihc vlucs 0I
scprIc sscIs rc kn0wn, Ihc Irms vluc cn
smply bc I0und by ddng Ihcr vlucs. Ths s
cllcd Ihc vlucddIvIy prncplc.
() !I s m0rc dIIculI I0 clculIc Ihn Ihc pybck
nd Ihc cc0unIng rIc 0I rcIurn (ARR), nd
() !I rclcs hcvly 0n Ihc c0rrccI csImI0n 0I Ihc
c0sI 0I cpIl, IhI s, whcrc crr0rs 0ccur n Ihc
c0sI 0I cpIl uscd I0r dsc0unIng, Ihc dccs0n
w0uld bc mslcdng.
Thc nIcrnl rIc 0I rcIurn (!RR) mcIh0d s n0Ihcr
dsc0unIcd csh Il0w Icchnquc whch Ikcs cc0unI 0I
Ihc Imc vluc 0I m0ncy. !I s ls0 kn0wn s ycld 0I
pr0|ccI, mrgnl cIIccncy 0I cpIl, rIc 0I rcIurn 0vcr
c0sI, Imc d|usIcd rIc 0I nIcrnl rcIurn nd s0 0n. !I
s dcIncd s Ihc c0sI 0I cpIl I0r whch Ihc NP\ 0I
pr0|ccI w0uld bc zcr0.
!I s brckcvcn p0nI c0sI 0I cpIl. !I s ls0 Ihc c0sI
0I cpIl 0r dsc0unI rIc IhI wll cquIc Ihc csh
nIl0ws 0I pr0|ccI wIh Ihc csh 0uIIl0ws 0I IhI pr0|ccI.
Thc I0rmul I0r clculIng Ihc !RR s gvcn s:
( )

=
=
+
=
n
I
0
I
I
0 C
r
C
!RR
Thc b0vc I0rmul sh0ws IhI I s Ihc smc s IhI I0r
clculIng NP\. Thc 0nly dIIcrcncc s IhI n NP\
mcIh0d, Ihc rcqurcd rIc 0I rcIurn s ssumcd I0 bc
kn0wn whlc n !RR mcIh0d Ihc rcqurcd rIc 0I rcIurn
hs I0 bc dcIcrmncd, hcncc, Ihc rcsulI s cquIcd I0
zcr0.
99
An lIcrnIvc mcIh0d I0 Ihc b0vc I0rmul s Ihc Irl
ndcrr0r. Ths s ls0 kn0wn s nIcrp0lI0n mcIh0d.
!n Ihs mcIh0d, Ihc dsc0unIng IcI0r ycldng p0sIvc
NP\ s mpr0vcd I0 m0vc I0wrds ncgIvc nd mdwy
s dsc0vcrcd I0 rrvc I zcr0. Thc I0rmulc:
( )
|
|
.
|

\
|

+
+ =
p N
N P
p
P
0F 0F
NP\ NP\
NP\
0F !RR
whcrc:
0F
p
= 0sc0unI IcI0r ycldng p0sIvc NP\
0F
N
= 0sc0unI IcI0r ycldng ncgIvc NP\
NP\
p
= P0sIvc NP\
NP\
N
= NcgIvc NP\
Usng Ihc dcIls n llusIrI0n 9.3, clculIc Ihc !RR 0I Ihc mchnc.
0. (200,000) .000 (200,000) .000 (200,000)
. b0,000 0.909 54,540 0.833 49,980
2. b0,000 0.82b 49,5b0 0.b94 4,b40
3. b0,000 0.75 45,0b0 0.579 34,740
4. b0,000 0.b83 40,980 0.482 28,920
5. b0,000 0.b2 37,2b0 0.402 24,20
b. b0,000 0.5b4 33,840 0.335 20,00

,
,

) (
) ( ,
,

+ =

+ =
= 0 + 9.92
N
N
N
N
00
AcccpI ll pr0|ccIs wh0sc !RR rc grcIcr Ihn Ihc c0mpny's c0sI 0I cpIl
.c AcccpI I r > k
Rc|ccI I r < k
My cccpI 0r rc|ccI I r = k
whcrc r= nIcrnl rIc 0I rcIurn nd k= c0sI 0I cpIl
!I muIully cxclusvc pr0|ccIs rc bcng c0nsdcrcd Ihc rulc s I0 cccpI Ihc
pr0|ccI IhI pr0duccs Ihc hghcsI !RR.
() !I rcc0gnscs Ihc Imc vluc 0I m0ncy
() !I c0nsdcrs ll csh Il0ws 0ccurrng 0vcr Ihc
cnIrc lIc 0I Ihc pr0|ccI
() !I gvcs Ihc smc cccpIncc rulc s Ihc NP\
mcIh0d.
(v) !I s c0nssIcnI wIh Ihc shrch0ldcrs wclIh
mxmsI0n 0b|ccIvc.
() !I s m0rc dIIculI I0 clculIc Ihn Ihc 0Ihcr
mcIh0ds.
() !I cn gvc mslcdng nd nc0nssIcnI rcsulIs
whcn Ihc NP\ 0I pr0|ccI d0cs n0I dcclnc wIh
dsc0unI rIcs.
() !n s0mc cscs, I Ils I0 ndcIc c0rrccI ch0cc
bcIwccn muIully cxclusvc pr0|ccIs.
(v) Unlkc n Ihc csc 0I NP\, Ihc ddIvIy prncplc
d0cs n0I h0ld whcn !RR mcIh0d s uscd !RR
pr0|ccIs d0 n0I dd.
(v) S0mcImcs, I yclds mulIplc rIcs.
0
Thc pr0IIblIy ndcx (P!) mcIh0d s n0Ihcr csh Il0w
Icchnquc. !I s Ihc rI0 0I Ihc prcscnI vluc 0I csh
nIl0ws, I Ihc rcqurcd rIc 0I Ihc nvcsImcnI. !I my bc
gr0ss 0r ncI IhI s, gr0ss mnus 0nc.
Thc I0rmul s gvcn s I0ll0ws:
Usng Ihc dcIls n llusIrI0n 93, clculIc Ihc P! 0I Ihc mchnc.
P! =
3 . 0
000 , 200
240 , b
0uIly csh !nIl
pr0|ccI 0I NP\
= =
0R
000 , 200
000 , 200 240 , b +
=
3 .
000 , 200
240 , 2b
= =
AcccpI ll pr0|ccIs wh0sc P! s p0sIvc 0r grcIcr Ihn (0nc)
.c. AcccpI I P! > 0 0r p0sIvc
Rc|ccI I P! < 0 0r ncgIvc
My cccpI 0r rc|ccI I P! = 0
0R
P\ 0I csh nIl0ws (NP\ + !nIl Csh 0uIly)
!nIl Csh 0uIly
P! =
NP\ 0I Pr0|ccI
!nIl Csh 0uIly
P! =
P\ 0I csh nIl0ws (NP\ + !nIl Csh 0uIly)
!nIl Csh 0uIly
P! =
02
() !I rcc0gnscs Ihc Imc vluc 0I m0ncy
() !I s vrI0n 0I Ihc NP\ mcIh0d nd rcqurcs
Ihc smc c0mpuII0n s n Ihc NP\ mcIh0d
() !I s rclIvc mcsurc 0I pr0|ccI's pr0IIblIy
sncc Ihc prcscnI vluc 0I csh nIl0ws s dvdcd
by Ihc nIl csh 0uIIl0w.
(v) !I s gcncrlly c0nssIcnI wIh Ihc wclIh
mxmsI0n prncplc
() !I cn 0nly bc uscd I0 ch00sc pr0|ccIs undcr
smplc, 0nc pcr0d, cpIl c0nsIrnI sIuI0ns.
() !I d0cs n0I w0rk whcn muIully cxclusvc pr0|ccIs
0r dcpcndcnI pr0|ccIs rc bcng c0nsdcrcd.
Ths Icchnquc s n mpr0vcmcnI 0vcr Ihc pybck
mcIh0d. !I s mcd I 0vcrc0mng Ihc pr0blcm 0I Ihc
Imc vluc 0I m0ncy dsdvnIgc 0I Ihc n0rml
pybck mcIh0d, by nc0rp0rIng nI0 Is clculI0n,
Ihc dsc0unI IcI0r. !n Ihc dsc0unIcd pybck pcr0d
mcIh0d, Ihc csh Il0ws rc dsc0unIcd nd uscd n Ihc
clculI0n 0I Ihc pybck pcr0d.
A mchnc wll c0sI 300,000 nd wll pr0vdc n nnul ncI csh
nIl0w 0I 00,000 I0r Ivc (5) ycrs. Thc 0pp0rIunIy c0sI 0I cpIl
s 0 pcrccnI.
ClculIc Ihc dsc0unIcd pybck pcr0d 0I Ihc mchnc
0 (300,000) .000 (300,000)
00,000 0.909 90,900
2 00,000 0.82b 82,b00
03
3 00,000 0.75 75,00
4 00,000 0.b83 b8,300
5 00,000 0.b2 b2,00
Usng Ihc smplc pybck pcr0d mcIh0d, Ihc Imc rcqurcd I0 rcc0vcr Ihc
nvcsImcnI s 3 yrs, clculIcd s I0ll0ws:
Ycrs 3
000 , 00
000 , 300
=
H0wcvcr usng Ihc dsc0unIcd pybck pcr0d mcIh0d, Ihc Imc rcqurcd I0
rcc0vcr Ihc nvcsImcnI s clculIcd s I0ll0ws:
0 (300,000) (300,000)
90,900 (209,00)
2 82,b00 (2b,500)
3 75,00 (5,400)
4 b8,300 b,900
5
0sc0unIcd pybck s
m0nIhs 2 x
300 , b8
400 , 5
yrs 3
|
.
|

\
|
+
= 3yrs + 9.03 m0nIhs = 3yrs 9 m0nIhs.
() !I rcc0gnzcs Ihc Imc vluc 0I m0ncy.
() !I I0cuscs 0n sh0rIncss 0I pr0|ccI I0 pybck Ihc
nIl 0uIly
() !n ddI0n I0 Ihc IcI IhI I rcc0gnscs Ihc Imc
vluc 0I m0ncy I hs ll Ihc dvnIgcs 0I Ihc
pybck mcIh0d.
() !I d0cs n0I Ikc nI0 cc0unI Ihc csh nIl0ws
crncd IIcr Ihc pybck pcr0d.
04
() !I d0cs n0I Ikc nI0 cc0unI Ihc rsks ss0cIcd
wIh cch pr0|ccI nd Ihc IIIudc 0I Ihc c0mpny
I0 rsk.
() ExccpI IhI I uscs dsc0unIcd csh Il0ws, I hs
ll Ihc dsdvnIgcs 0I pybck mcIh0d.
CpIl cxpcndIurc rcprcscnIs cxpcndIurc n l0ngIcrm sscIs 0I Ihc
c0mpny, b0Ih Ingblc nd nIngblc. Ths chpIcr, h0wcvcr dclI wIh
Ingblc qunIIblc Ixcd sscIs. whcrcs, Ihc cxpcndIurc 0n Ihcsc sscIs
s n0w, rcIurns rc n Ihc IuIurc. Thcrc s, IhcrcI0rc, nccd I0r pr0pcr plnnng
nd c0nIr0l. Thc plnnng nd c0nIr0l pr0ccss nv0lvcs dcnIIcI0n,
dcvcl0pmcnI, cvluI0n, uIh0rsI0n nd c0nIr0l.
A vcry mp0rInI spccI 0I Ihc Inncl mngcr's IuncI0n s Ihc cvluI0n
0I cpIl pr0|ccIs. Hcrc dccs0ns hvc I0 bc Ikcn 0n whcIhcr 0r n0I
prIculr pr0|ccI s cccpIblc, bscd 0n Ihc usc 0I n ppr0prIc pprsl
Icchnquc nd 0n Ihc ld d0wn dccs0n crIcr0n, such Icchnquc ncludcs
Ihc n0ndsc0unIcd csh Il0w Icchnqucs, nmcly: Ihc ARR nd pybck pcr0d
nd Ihc dsc0unIcd csh Il0w Icchnquc such s NP\, !RR nd P!. !I s
IundmcnIl IhI c0mpny uscs Ihc rghI Icchnquc I0 v0d wr0ng
dccs0ns, bcrng n mnd Ihc Inncl mplcI0n such dccs0ns cn brng
I0 Ihc c0mpny. !I sh0uld bc n0Icd IhI pr0|ccI musI IrsIly bc pr0pcrly
cvluIcd bcI0rc sclccI0n. !I s Ihc cccpIblc pr0|ccI IhI s ncludcd n Ihc
cpIl cxpcndIurc pr0grmmc 0I Ihc c0mpny I0r Ihc ycr.
9.5.
. Thc csscncc 0I dsc0unIng s I0 Ikc crc 0I
A !nIlI0n
UnccrInIy
C Tmng 0I csh Il0ws
0 Am0unI 0I csh Il0ws
E TxI0n 0I csh Il0ws
2. whch 0I Ihc I0ll0wng s rcgrdcd, n Ihc0ry s n nc0rrccI Icchnquc
0I nvcsImcnI pprsl!
A Acc0unIng rIc 0I rcIurn (ARR)
!nIcrnl rIc 0I rcIurn (!RR)
C 0sc0unIcd pybck
05
0 NcI PrcscnI vluc (NP\)
E Pr0IIblIy !ndcx (P!)
3. A mchnc c0sIs N3.4m. Thc mchnc s cxpccIcd I0 pr0ducc n vcrgc
nnul csh Il0ws 0I N850,000 wIh nl slvgc vluc. whI s Ihc
cxpccIcd pybck pcr0d 0I Ihc mchnc I Ihc cc0n0mc uscIul lIc 0I
Ihc mchnc s b ycrs!
A b ycrs
4 ycrs
C 5 ycrs
0 3 ycrs
E 2 ycrs
4. whch 0NE 0I Ihc I0ll0wng s n0I n dvnIgc 0I cc0unIng rIc 0I
rcIurn!
A Esy I0 clculIc
Smplc I0 undcrsInd nd usc
C !ncxpcnsvc s I uscs cxsIng cc0unIng nI0rmI0n
0 !nc0rp0rIcs cnIrc sIrcm 0I nc0mc
E !I Ikcs nI0 cc0unI Ihc Imc vluc 0I m0ncy
5. A c0mpny nIcnds I0 undcrIkc n nvcsImcnI pr0grmmc whch hs
nIl m0unI 0I N2.5m. Thc pr0grm s cxpccIcd I0 gcncrIc nnul ncI
csh nIl0ws 0I N270,000 I0r n ndcInIc IuIurc pcr0d. Thc c0mpny's
0pp0rIunIy c0sI 0I Iund s 2 pcrccnI pcr nnum.
whI s Ihc NcI prcscnI vluc 0I Ihc pr0|ccI!
A N2,550,000
N2,000,000
C N2,450,000
0 N2,250,000
E N2,350,000
9.5.2
. SIIc 0nc kcy rcs0n I0r pr0pcr plnnng 0I cpIl cxpcndIurc.
2. SIIc 0nc m|0r rcs0n I0r Ihc p0pulrIy 0I pybck mcIh0d 0I nvcsImcnI
pprsl dcspIc Is nc0rrccIncss.
3. whI s Ihc mplcI0n 0I usng wr0ng dsc0unI rIc whcn usng NP\
ppr0ch.
4. whI s Ihc rclI0nshp bcIwccn NcI prcscnI vluc nd shrch0ldcr
wclIh!
5. whI s Ihc dccs0n rulc whcn nIcrnl rIc 0I rcIurn mcIh0d s uscd I0
cvluIc pr0|ccI!
07
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ EvluIc cpIl pr0|ccIs wIh dIIcrcnI lvcs,
+ EvluIc cpIl pr0|ccIs nv0lvng rcplccmcnI nd bnd0nmcnI dccs0ns,
+ EvluIc cpIl pr0|ccIs undcr c0ndI0ns 0I cpIl rI0nng, nd
+ Pr0vdc mIhcmIcl pr0grmmng I0rmulI0n I0r Iypcl mulIpcr0d
c0nsIrnI pr0blcm.
!n prcIcc, c0mpny Iccs c0mplcIcd nvcsImcnI dccs0ns. Thc m0sI
c0mm0n sIuI0ns ncludc ch00sng m0ng nvcsImcnIs wIh dIIcrcnI lvcs,
dccdng b0uI Ihc rcplccmcnI 0I n cxsIng sscI 0r Imng 0I n nvcsImcnI
nd cvluIng nvcsImcnIs undcr nIlI0n 0r cpIl rI0nng. Thc NP\
rulc cn bc cxIcndcd I0 hndlc such sIuI0ns.
!n 0rdcr I0 ch00sc bcIwccn muIully cxclusvc pr0|ccIs wIh Ihc smc lvcs,
Ihc NP\s rc c0mprcd nd Ihc pr0|ccI wIh hghcr NP\ s ch0scn. H0wcvcr
whcrc Iw0 muIully cxclusvc pr0|ccIs bcng c0mprcd hvc dIIcrcnI lvcs,
Ihc usc 0I Ihc NP\ rulc, wIh0uI cc0unIng I0r Ihc dIIcrcncc n Ihc pr0|ccIs'
lvcs, my Il I0 ndcIc Ihc c0rrccI ch0cc. !n Ihs csc, Ihcrc s nccd I0
cvluIc Ihc pr0|ccI I0r n cqul pcr0d 0I Imc I0 bc blc I0 rrvc I
rcs0nblc dccs0n.
Supp0sc c0mpny hs I0 ch00sc bcIwccn Iw0 grndng mchncs L nd M
whch rc 0I dIIcrcnI dcsgns buI pcrI0rm Ihc smc IuncI0n. Mchnc L w0uld
nv0lvc n nIl csh 0uIly 0I N2,000 nd 0pcrIng csh cxpcnscs 0I
N4,000 pcr ycr I0r b ycrs. 0n Ihc 0Ihcr hnd, mchnc M w0uld nv0lvc n
nIl csh 0uIly 0I N0,000 nd 0pcrIng csh cxpcnscs 0I N5,000 pcr
08
ycr I0r 3 ycrs. !I Ihc 0pp0rIunIy c0sI 0I cpIl s 4 pcrccnI, Ihc prcscnI
vluc 0I c0sIs w0uld bc s I0ll0ws:
Y
0 2 .000 2.000 0 .000 0.000
4 0.877 3.508 5 0.877 4.385
2 4 0.7b9 3.07b 5 0.7b9 3.845
3 4 0.b75 2.700 5 0.b75 3.375
4 4 0.592 2.3b8
5 4 0.59 2.07b
b 4 0.45b .824
!I Ihc dIIcrcncc n Ihc pr0|ccIs lvcs s dsrcgrdcd, mchnc M wll bc ch0scn
sncc I hs l0wcr prcscnI vluc 0I c0sIs. uI Ihs nccd n0I ncccssrly bc
Ihc bcsI dccs0n I0r Ihc c0mpny Ikng nI0 c0nsdcrI0n Ihc IcI IhI
mchnc L wll lsI I0r b ycrs whlc mchnc M wll lsI I0r 3ycrs nd wll
nccd I0 bc rcplccd I Ihc cnd 0I Ihc 3rd ycr.
Usng llusIrI0n 0 nd ssumng IhI mchnc M s rcplccd I Ihc cnd
0I Ihc 3rd ycr I Ihc smc nIl 0uIly nd smc 0pcrIng cxpcnscs nd
lIc cxpccIncy, Ihc ncw p0sI0n w0uld bc s I0ll0ws:
Y
0 2 .000 2.000 0 .000 0.000
4 0.877 3.508 5 0.877 4.385
2 4 0.7b9 3.07b 5 0.7b9 3.845
3 4 0.b75 2.700 5 0.b75 0.25
4 4 0.592 2.3b8 5 0.592 2.9b0
5 4 0.59 2.07b 5 0.59 2.595
b 4 0.45b .874 5 0.45b 2.280
y Ihc cnd 0I ycr b, mchnc L w0uld nccd I0 bc rcplccd whlc mchnc M
w0uld nccd I0 bc rcplccd Ihc scc0nd Imc. whcn Ihc P\s I0 Ihc Iw0 mchncs
rc c0mprcd I Ihc cnd 0I ycr b, mchnc L wll bc ch0scn. Thus, Ihc usc 0I
smplc NP\ rulc w0uld gvc nc0rrccI rcsulIs whcn Iw0 pr0|ccIs wIh dIIcrcnI
lvcs rc c0nsdcrcd.
09
!n 0rdcr I0 0vcrc0mc Ihs pr0blcm, I s dvsblc I0 usc Ihc Annul EquvlcnI
\luc (AE\) 0r Annul EquvlcnI C0sI (AEC) 0I Ihc sscIs s gnsI Ihc
NP\s.
Annul EquvlcnI \luc (AE\) s Ihc NP\ 0I n nvcsImcnI dvdcd by Ihc
nnuIy IcI0r gvcn Is lIc nd dsc0unI rIcs.
AE\ =
FcI0r AnnuIy
NP\
Ths mcIh0d s rcc0mmcndcd cspcclly whcrc Ihcrc s n0 nIlI0n s I s
quckcr nd lcss cumbcrs0mc Ihn ny 0Ihcr mcIh0d.
Usng llusIrI0n 0. Ihc p0sI0n wll bc s I0ll0ws:
Y
0 2 .000 2.000 0.00 .000 0.000
4 0.877 3.508 7.09 5.00 0.877 4.385 9.3
2 4 0.7b9 3.07b 7.09 5.00 0.7b9 3.845 9.3
3 4 0.b75 2.700 7.09 5.00 0.b75 3.375 9.3
4 4 0.592 2.3b8 7.09
5 4 0.59 2.07b 7.09
b 4 0.45b .824 7.09
3.888 27.552 2.b05
AE\ I0r mchncs L nd M rc clculIcd s I0ll0ws:
AE\ =
IcI0r AnnuIy
NP\

whcrc nnuIy IcI0r rcprcscnIs prcscnI vluc 0I pcr ycr I0r y Ycrs @ X
pcrccnI .c. 3.888 nd 2.32 I0r L & M rcspccIvcly s sh0wn n llusIrI0n
0
AE\ I0r Mchnc L =
888 . 3
522 , 27
= 7,090
AE\ I0r Mchnc M =
32 . 2
b05 , 2
= 9,30
Thc clculI0ns sh0w IhI chn 0I mchnc L'S csh Il0w s cxcIly cqul
I0 nnul csh Il0ws 0I 7,090 whlc chn 0I mchnc M's csh Il0ws s
cxcIly cqul I0 9,30. Sncc scrcs 0I 9,30 ycr s w0rIh m0rc Ihn
IhI 0I 7,090 ycr, chn 0I mchnc M's csh Il0ws (c0sIs) sh0uld bc
0
hghcr Ihn IhI 0I chn 0I mchnc L's. !n Ihs rcspccI mchnc L wll bc
ch0scn nd Ihs s n grccmcnI wIh llusIrI0n 0.2 b0vc.
!n Ihc prcv0us sccI0n, Ihc mcIh0d 0I c0nsInI rcplcI0n 0r rcplccmcnI
chns I0 ch00sc bcIwccn sscIs wIh dIIcrcnI lvcs ws dscusscd. !n Ihc
llusIrI0ns, I ws ssumcd IhI sscIs rc rcplccd I Ihc cnd 0I Ihcr
physcl lvcs buI Ihs s n0I usully Ihc csc n prcIcc. !n m0sI cscs
rcplccmcnI dccs0ns rc g0vcrncd by Ihc cc0n0mc nd ncccssIy
c0nsdcrI0ns. An cqupmcnI sh0uld bc rcplccd whcncvcr m0rc cc0n0mc
lIcrnIvc s vlblc.
S0mc c0mpncs I0ll0w Ihc prcIcc 0I ppr0vng ncw mchnc 0nly whcn
Ihc cxsIng 0nc cn n0 l0ngcr IuncI0n. Thcy d0 n0I dccdc whcn I0 rcplcc,
Ihc mchnc dccdcs I0r Ihcm. Ths s 0nc 0I Ihc m0sI cxpcnsvc p0lccs
whch c0mpny c0uld I0ll0w. A c0mpny IhI I0ll0ws Ihs prcIcc s lkcly
I0 g0 nI0 lqudI0n s00ncr 0r lIcr I crc s n0I Ikcn s I wll bc unblc I0
c0mpcIc Iv0urbly wIh c0mpncs IhI d0pI c0sIrcducI0n p0lccs by
I0ll0wng sysIcmIc rcplccmcnI p0lcy nd rc blc I0 rcducc prccs n
Ihc IuIurc.
ThcrcI0rc, I0r Irm I0 rcmn n busncss I sh0uld I0ll0w rcplccmcnI
p0lcy bscd 0n cc0n0mc c0nsdcrI0ns nd dccdc whcn I0 rcplcc.
An cc0n0mc nlyss my ndcIc rcplccmcnI 0I mchnc whcn I s
sy, 4 ycrs 0ld wIh n mpr0vcd lIcrnIvc. H0wcvcr I Ihc mchnc s
rcIncd Ill whcn I s bcy0nd rcprs, sy 5 ycrs, Ihc c0mpny musI hvc
bccn ncurrng cxIr c0sIs 0n mnIcnncc nd l0sng cxIr pr0II I0r
ycrs.
Supp0sc c0mpny s 0pcrIng mchnc whch s cxpccIcd I0 pr0ducc ncI
csh nIl0ws 0I 5 mll0n, 4mll0n, 3mll0n nd 2mll0n rcspccIvcly
I0r Ihc ncxI 4ycrs. A ncw mchnc, whch s m0rc cIIccnI I0 0pcrIc nd
c0sI cIIccIvc hs |usI bccn nIr0duccd nI0 Ihc mrkcI. !I s cxpccIcd IhI Ihc
ncw mchnc wll c0sI 5mll0n nd wll pr0vdc ncI csh nIl0w 0I
7mll0n ycr I0r sx ycrs. whI sh0uld Ihc c0mpny d0!
0nc ppr0ch s n0I I0 c0nsdcr rcplccmcnI sncc Ihc mchnc cn sIll d0
Ihc |0b. !n IhI csc Ihc mchnc my bc c0nsdcrcd I0r rcplccmcnI IIcr
4ycrs.

uy Ihc ncw mchnc wIh0uI ny c0nsdcrI0n I0r Is cc0n0mc dvnIgc

0vcr Ihc 0ld mchnc.
Thc nlyss rc mdc s I0ll0ws:
Y
0 .000 (5,000) .000 (5,000)
5,000 0.877 4,385 3,bb0 7,000 0.877 b,39 3,40
2 4,000 0.7b9 3,07b 3,bb0 7,000 0.7b9 5,383 3,40
3 3,000 0.b75 2,025 3,bb0 7,000 0.b75 4,725 3,40
4 2,000 0.592 ,84 3,bb0 7,000 0.592 4,44 3,40
5 0.59 7,000 0.59 3,b33 3,40
b 0.45b 7,000 0.45b 3,92 3,40
3.888 0,b70 2,2b
Thc b0vc Iblc sh0ws IhI chn 0I Ihc csh Il0ws I0r Ihc ncw mchnc s
cquvlcnI I0 n nnuIy 0I ( 2.2b ) 888 3 ) mll0n = 3.4 mll0n pcr
ycr I0r Ihc lIc 0I Ihc mchnc. Thc 0ld mchnc pr0vdcs n nnuIy 0I
( 0.b70 93 2 ) mll0n = 3.bb mll0n whcrc 3.888 nd 2.93 rcprcscnI
prcscnI vluc 0I n nnuIy I0r b ycrs nd 4ycrs rcspccIvcly I 4.
Sncc Ihc 0ld mchnc gcncrIcs csh nIl0w 0I m0rc Ihn 3.4 mll0n
whch Ihc ncw mchnc gcncrIcs, Ihcrc d0cs n0I sccm I0 bc n cc0n0mc
|usIIcI0n I0r rcplccmcnI.
Ths cxmplc cn bc cxIcndcd I0 nc0rp0rIc slvgc vluc. uI Ihs w0uld
n0I chngc Ihc pr0ccdurc I0r Ihc nlyss.
0Ihcr mcIh0ds IhI cn bc d0pIcd I0r Ihc purp0sc 0I mkng 0pIml
dccs0ns prI Ir0m Ihc AE\ 0r AEC mcIh0ds rc:
+ LcsI C0mm0n MulIplc
+ FnIc H0rz0n mcIh0d
H0wcvcr, Ihc m0sI p0pulr Icchnquc s Ihc AE\ 0r AEC llusIrIcd b0vc.
2
Ths mcIh0d cxmncs Ihc csh Il0ws 0I ll p0ssblc cyclcs, 0I Ihc
mchnc 0vcr n cqul numbcr 0I ycrs. Ths pcr0d s usully Ihc
lcsI c0mm0n mulIplc (LCM) 0I ll cyclc, I0r cxmplc, I0r mchnc
IhI hs lIc spn 0I I0ur ycrs, Irm my ch00sc I0 rcplcc I
cvcry ycr, cvcry Iw0 ycrs cvcry Ihrcc ycrs 0r cvcry I0ur ycrs.
Thc LCM ppr0ch rcqurcs Ihc cxmnI0n 0I Ihc rclcvnI csh
Il0ws 0I Ihcsc cyclc 0vcr pcr0d 0I Iwclvc ycrs I0r mchnc IhI
hs lIc spn 0I 4 ycrs. Thc cyclc wIh Ihc lcsI prcscnI vluc 0I
c0sI, 0r hghcsI vluc 0I rcvcnuc w0uld bc ch0scn.
A m|0r drwbck 0I Ihs mcIh0d s IhI n sscI wIh l0ng lIc
spn wll rcqurc c0mpuII0n 0vcr vcry l0ng pcr0d.
Ths mcIh0d cxmncs csh Il0ws 0I ll cyclcs 0vcr I0rcsccblc
pcr0d. Ths pcr0d s n0rmlly Ihc lcngIh 0I Imc wIhn whch Ihc
c0mpny's Inncl mngcmcnI Icm cn gcncrIc rclblc
csImIcs.
A m|0r drwbck 0I Ihs mcIh0d s IhI Ihc ch0cc 0I Ihc I0rcsccblc
IuIurc 0r Ihc InIc h0rz0n s sub|ccIvc nd vrcs m0ng dccs0n
mkcrs.
!nIlI0n s n mp0rInI IcI0r 0I cc0n0mcs nd musI bc c0nsdcrcd n
cpIl budgcIng. Sncc Ihc csh Il0ws 0I n nvcsImcnI pr0|ccI my 0ccur
0vcr l0ng pcr0d 0I Imc, Ihc mpcI 0I nIlI0n sh0uld bc c0rrccIly ncludcd
I0r Ihc nvcsImcnI nlyss I0 bc Ircc 0I bs.
Thc mpcI 0I nIlI0n n cpIl budgcIng c0uld bc d|usIcd I0r, cIhcr n
Ihc csh Il0w 0r Ihc dsc0unIng rIc. Thc dsc0unI rIc s usully mrkcI
dcIcrmncd nd sIIcd n n0mnl Icrms.
H0wcvcr whcrc cIhcr csh Il0ws 0r dsc0unI rIcs rc cxprcsscd n rcl Icrms,
Ihcy cn bc rcvcrIcd I0 Ihcr n0rml vluc Ihr0ugh Ihc I0ll0wng I0rmul
whch n cc0n0mc Ihc0ry s kn0wn s "Fshcr's cIIccI".
N0mnl RIc = ( + Rcl RIc) ( + !nIlI0n RIc)
Ths cquI0n cn ls0 bc uscd I0 dcrvc Ihc rcl rIc 0I rcIurn Ihus:
Rcl RIc =

RIc !nIlI0n
RIc N0mnl

+
+
3
!I Ihc dsc0unI rIc s sIIcd n n0mnl Icrms, Ihcn c0nssIcncy rcqurcs IhI
csh Il0ws bc csImIcd n n0mnl Icrms, Ihus Ikng cc0unI 0I nIlI0n
rIcs.
C0sIs rc usully scnsIvc I0 nIlI0n, s0mc c0sIs ncrcsc I IsIcr rIc
Ihn 0Ihcrs. CcrIn Icms rc n0I IIccIcd by nIlI0n, I0r nsIncc Ihc Ix
shcld 0n dcprccI0n (I0r Ix purp0scs, dcprccI0n s n0I ll0wcd 0n Ihc
b00k vluc). !n cvluIng Ihc cc0n0mc w0rIh 0I pr0|ccI, Ihc rcl csh
Il0ws c0uld bc dsc0unIcd I rcl dsc0unI rIc, (lIh0ugh n0I c0mm0n) 0r
Ihc n0mnl csh Il0ws dsc0unIcd I Ihc n0mnl rIc.
0Ih mcIh0ds wll usully gvc Ihc smc nswcr sub|ccI I0 ppr0xmI0n
crr0r.
Supp0sc Irm I0rccsIs Ihc I0ll0wng pr0|ccI csh Il0ws n rcl Icrms nd
dsc0unI I 5 n0mnl rIc. Sh0uld Ihc Irm nvcsI n I I 0 rIc 0I
nIlI0n s ssumcd!
Pr0|ccI Csh Il0ws (00,000) 35,000 50,000 30,000
!I w0uld bc nc0nssIcnI I0 dsc0unI Ihc rcl csh Il0ws I 5 n0mnl rIc.
Thc qucsI0n cn bc s0lvcd by c0nvcrIng rcl csh Il0ws I0 n0mnl csh
Il0ws nd dsc0unIng I 5 n0mnl rIc, I0 0bIn Ihc rcl rIc 0I rcIurn.
AlIcrnIvc :C0nvcrIng rcl csh Il0ws I0 n0mnl Icrms.
Yrs Rcl Csh N0mnl Csh
Fl0ws Fl0ws
0 (00,000) 00,000 (.00) = (00,000)
35,000 35,000 (+0.) = 38,500
2 50,000 50,000 (+0.)
2
= b0,500
3 30,000 30,000 (+0.)
3
= 39,930
NP\ =
3 2
) 5 . (
930 , 39
) 5 . (
500 , b0
5 .
500 , 38

) 000 , 00 (
+ + +
= ( 00,000) + 33,478 + 45,747 + 2b,255
= 5,480
AlIcrnIvc !!: C0nvcrIng n0mnl rIc I0 rcl rIc.
4
Rcl RIc =

RIc !nIlI0n
RIc l mn N0

+
+
Rcl RIc =

0 . 0
5 . 0

+
+
=

0 .
5 .

= 0.0455
= 4.55
NP\ =
3 2
) 0455 . (
000 , 30
) 0455 . (
000 , 50
) 0455 . (
000 , 35
) 000 , 00 ( + + +
= ( 00,000)+ 33,477+ 45,74b+ 2b25
= 5,474
C0nclusvcly, pr0|ccIs' csh Il0ws sh0uld bc d|usIcd I0r nIlI0n s0 IhI Ihc
pr0IIblc 0ncs w0uld n0I bc rc|ccIcd.
Alwys dsc0unI n0mnl csh Il0ws I n0mnl dsc0unI rIc 0r
dsc0unI rcl csh Il0ws I rcl dsc0unI rIc.
CpIl rI0nng rscs whcn Ihcrc rc nsuIIccnI Iunds I0 cxccuIc ll vblc
nd pr0IIblc pr0|ccIs. Thc ndcqucy 0I rcs0urccs I0 Inncc pr0|ccIs my
rsc duc I0 cxIcrnl IcI0rs 0r nIcrnl c0nsIrnIs mp0scd by Ihc
mngcmcnI. Thcsc c0nsIrnIs my rclIc I0 Ihc mpcrIccI0ns n Ihc cpIl
mrkcIs nd sclI mp0scd rcsIrcI0ns by Ihc mngcmcnI. Undcr cpIl
rI0nng, Ihc 0b|ccIvc s I0 sclccI Ihc c0mbnI0n 0I nvcsImcnI pr0p0sls
whch ycld Ihc hghcsI ncI prcscnI vluc (NP\) sub|ccI I0 vlblIy 0I
Iunds.
H0wcvcr, sclccI0ns sh0uld n0I bc d0nc s0lcly 0n Ihc bss 0I ndvdul NP\s
I Ihc Irm ms I0 mxmsc NP\ sub|ccI I0 Ihc Iunds c0nsIrnI. !n smplc
snglc 0r 0nc pcr0d c0nsIrnI sIuI0n, Irm ms I0 gcI Ihc lrgcsI bcncII
I0r Ihc lmIcd Iunds, IhI s, I0 sclccI Ih0sc pr0|ccIs IhI gvc Ihc hghcsI
rI0 0I ncI prcscnI vluc pcr unI 0I Ihc cpIl nvcsIcd. Ths rI0 s kn0wn
s: pr0IIblIy ndcx (P!) nd I s clculIcd s I0ll0ws:
5
Pr0IIblIy !ndcx (P!)
=
0uIly !nIl
nIl0ws csh 0I vluc PrcscnI
0R
0uIly !nIl
0uIly !nIl NP\ +
H0wcvcr, pr0|ccIs undcr cpIl rI0nng sIuI0n mghI nv0lvc muIully
cxclusvc 0r muIully dcpcndcnI 0r dvsblc pr0|ccIs. Crc musI bc Ikcn I0
IrcI cch csc Ih0r0ughly.
()
!n Ihs csc Ihcrc s n mplcI lncrIy ssumpI0n bcIwccn Ihc nIl
0uIlys nd Ihc NP\s 0I pr0|ccIs. !I s ssumcd IhI IrcI0ns 0I pr0|ccI
cn bc undcrIkcn.
(b)
Thc ssumpI0n n Ihs csc s IhI pr0|ccIs rc n0I dvsblc IrcI0ns
nd cnn0I IhcrcI0rc bc undcrIkcn n prIs. !I s 0nly n Ihs csc IhI
Ihcrc my bc surplus Iunds whch rcprcscnIs Ihc vlblc Iunds IIcr
ll0cI0n.
(c)
!n Ihs csc, cccpIncc 0I 0nc 0I Ihc muIully dcpcndcnI pr0|ccIs
uI0mIclly mplcs n cccpIncc 0I Ihc rcmnng muIully
dcpcndcnI pr0|ccIs. F0r cxmplc, I pr0|ccIs A nd rc muIully
dcpcndcnI, I mcns IhI 0nc cn 0nly cccpI 0r rc|ccI b0Ih pr0|ccIs
nd n0I undcrIkc 0nly 0nc 0I Ihcm.
(d)
!n Ihs sIuI0n, n cccpIncc 0I 0nc pr0|ccI gr0up mplcs Ihc
rc|ccI0n 0I ll Ihc 0Ihcr pr0|ccI gr0up.
Supp0sc c0mpny s Iccd wIh pr0blcm 0I nvcsIng mll0n n Ihrcc
pr0|ccIs whch rc ll IIrcIvc nd pr0IIblc @ 2 pcrccnI 0pp0rIunIy
c0sI 0I cpIl. whch 0I Ihc pr0|ccIs sh0uld bc undcrIkcn gvcn Ihc I0ll0wng
cvluI0n rcsulIs!
,000 20
2 500 b0
3 500 20
b
ClculI0n 0I pr0IIblIy ndcx.
N0Ic All Igurcs rc n '000
P =
0R
0uIly !nIl
0uIly !nIl NP\+
P! Pr0|ccI =
2 .
000
20 ,
000
000 20
= = |
.
|

\
| +
P! Pr0|ccI 2 =
32 .
500
bb0
500
500 b0
= = |
.
|

\
| +
P! Pr0|ccI 3 =
24 .
500
b20
500
500 20
= = |
.
|

\
| +
,000 20 .2
ST
3
R0
2 500 b0 .32 2
N0

ST
3 500 20 .24 3
R0
2
N0
Thc Iblc b0vc sh0ws IhI Ihc Ihrcc pr0|ccIs rc vblc nd sh0uld bc
undcrIkcn I Ihcrc s n0 cpIl c0nsIrnI buI Ihc qucsI0n sIIcs IhI Ihc
c0mpny hs 0nly mll0n I0 nvcsI.
Usng Ihc NP\ rulc, Ihc Irm wll cccpI pr0|ccI wIh NP\ 0I 20,000 IhI
wll cxhusI Ihc vlblc Iund buI Ihc P! suggcsI 0Ihcrwsc. Thc P! suggcsIs
Ihc sclccI0n 0I pr0|ccIs 2 nd 3 whch I0gcIhcr hvc hghcr NP\ 0I 280,000
( b0,000+ 20,000) s gnsI 20,000 0I pr0|ccI nd wIh Ihcr
0uIlys wIhn Ihc budgcI cclngs.
Thc c0mpny sh0uld IhcrcI0rc undcrIkc pr0|ccIs 2 nd 3 n prcIcrcncc I0
pr0|ccI I0 0bIn Ihc hghcsI p0ssblc NP\.
T0Il 0I P\ 0I Csh nIl0ws
!nIl 0uIly
7
XY Plc s Iccd wIh pr0blcm 0I nvcsIng 30mll0n n 5 pr0IIblc pr0|ccIs
@ 5 pcr ccnI 0pp0rIunIy c0sIs 0I cpIl. Thc I0ll0wng rc Ihc vlblc
pr0|ccIs wIh Ihc csh Il0ws 0I cch pr0|ccI bcng gcncrIcd I c0nsInI
m0unI Ihr0ugh0uI Ihc cc0n0mc lIc 0I Ihc pr0|ccI whch s 5 ycrs n cch
csc.
'000 '000
A 0,000 4,000
2,000 5,000
c b,000 3,000
0 3,000 ,000
E ,000 4,500
whch 0I Ihc pr0|ccIs sh0uld bc undcrIkcn I Ihcy wcrc:
() 0vsblc!
() !ndvsblc!
A 0,000 4,000 3.352 3408 3408 0.34 4Ih
2,000 5,000 3.352 b7b0 47b0 0.40 2nd
C b,000 3,000 3.352 005b 405b 0.b8 sI
0 3,000 ,000 3.352 3352 352 0.2 5Ih
E ,000 4,500 3.352 5084 4084 0.37 3rd
()
All0cI0ns '000's
Avlblc Fund 30,000
SclccI Pr0|ccI C b,000
24,000
SclccI Pr0|ccI 2,000
2,000
SclccI Pr0|ccI E ,000
,000
SclccI 0 0I Pr0|ccI A ,000
N!L
AcccpI pr0|ccIs C, nd E nd 0 0I pr0|ccI A
8
()
All0cI0ns '000's
Avlblc Fund 30,000
SclccI Pr0|ccI C b,000
24,000
SclccI Pr0|ccI 2,000
2,000
SclccI Pr0|ccI E ,000
Surplus Fund ,000
AcccpI pr0|ccIs C, , E nd nvcsI blncc, IhI s, Ihc surplus Iund.
AC Plc hs cpIl budgcI 0I 2mll0n I0r nvcsImcnI. Thc c0mpny
hs prcscnIcd Ihc I0ll0wng nvcsImcnI pr0p0sl I0 y0u I0r dvcc n y0ur
cpcIy s Ihc Fnncl Advscr I0 Ihc c0mpny.
Pr0|ccIs A C 0 E F 0 H ! 1
Pr0IIblIy !ndcx .7 .20 .9 .22 .5 .5 .22 .20 .b .0
0uIly ( 'mll0n) 2.00 3.00 .50 4.00 4.00 2.00 .00 .50 .00 3.00
Thc c0mpny's cxpccIcd c0sI 0I cpIl s 5 Pr0|ccIs A nd 0 rc muIully
dcpcndcnI whlc pr0|ccIs nd C rc muIully cxclusvc.
Rcqurcd:
As Ihc Inncl dvscr I0 Ihc c0mpny, whch pr0|ccIs wll y0u rcc0mmcnd!
Assumc IhI IrcI0ns 0I pr0|ccI cn bc undcrIkcn
A nd 0 .20 4Ih b,000 220
.20 3rd 3,000 b00
E .5 7Ih 4,000 b00
F .5 bIh 2,000 300
0 .22 sI ,000 220
H .20 2nd ,500 300
! .b 5Ih ,000 b0
1 .0 8Ih 3.000 300
9
Avlblc Fund 2,000
SclccI Pr0|ccI 0 ,000 220
,000
SclccI Pr0|ccI H ,500 300
9,500
SclccI Pr0|ccI 3,000 b00
b,500
SclccI Pr0|ccI A&0 b,000 220
500
SclccI 50 Pr0|ccI ! 500 80
N!L 2420
T0TAL NP\ = 2.420 mll0n
N: Ths gr0up ncludcs nd cxcludcs pr0|ccI C bccusc Ihc Iw0 rc
muIully cxclusvc whlc pr0|ccIs 'A' nd '0' rc muIully dcpcndcnI.
A nd 0 .20 3rd b,000 220
C .9 4Ih ,500 285
E .5 7Ih 4,000 b00
F .5 bIh 2,000 300
0 .22 sI ,000 220
H .20 2nd ,500 300
! .b 5Ih ,000 b0
1 .0 8Ih 3.000 300
Avlblc Fund 2,000
SclccI Pr0|ccI 0 ,000 220
,000
SclccI Pr0|ccI H ,500 300
9,500
SclccI Pr0|ccI A&0 b,000 220
3,500
SclccI Pr0|ccI C ,500 285
2,000
SclccI Pr0|ccI ! ,000 b0
,000
SclccI 50 0I Pr0|ccI F ,000 50
N!L 2335
T0TAL NP\= 2.335mll0n
20
N: Ths gr0up ncludcs pr0|ccI 'C' nd cxcludcs pr0|ccI '' bccusc b0Ih rc
muIully cxclusvc whlc pr0|ccIs 'A' nd '0' rc muIully dcpcndcnI.
Thc c0mpny s dvscd I0 ch00sc pr0|ccIs 0, H, , A&0 nd 50 0I pr0|ccI '!'
(0R0UP A) bccusc Ihcy pr0duccd Ihc hghcr NP\ 0I 2.420mll0n
c0mprcd I0 IhI 0I gr0up 0I 2.335mll0n
N0Ic: Thc P! I0r pr0|ccIs 'A&0' s clculIcd s I0ll0ws:
Pl=
( ) ( )
mll0n 4 mll0n 2
mll0n 4 x 22 . mll0n 2 x 7 .
+
+
20 .
mll0n b
mll0n 220 . 7
mll0n 4 mll0n 2
mll0n 880 . 4 mll0n 340 . 2
=
=
+
+
=
Rcdcrs sh0uld n0Ic IhI, n snglc c0nsIrnI pr0blcm, Irm sh0uld n0I
sclccI pr0|ccIs s0lcly 0n Ihc bss 0I ndvdul NP\s whcn Iunds rc lmIcd,
rIhcr, Ihc NP\ rulc sh0uld bc m0dIcd I0 nc0rp0rIc Ihc P! rI0 wIh I0p
rnkcd pr0|ccIs undcrIkcn unIl Iunds rc cxhusIcd.
H0wcvcr, Ihc P! rulc hs Is 0wn lmII0n s I d0cs n0I lwys w0rk n
sIuI0ns whcrc Ihcrc rc Iw0 0r m0rc c0nsIrnIs 0r whcn muIully cxclusvc
pr0|ccIs 0r dcpcndcnI pr0|ccIs rc I0 bc c0nsdcrcd. !n Ihcsc cscs, m0rc
s0phsIcIcd ppr0ch, lncr pr0grmmng 0r nIcgcr pr0grmmng cn
bc uscd.
CpIl nvcsImcnI dccs0ns undcr mulIpcr0d Iunds c0nsIrnI sIuI0ns
hvc Ihc 0b|ccIvc 0I ch00sng c0mbnI0n 0I pr0|ccIs whch gvcs Ihc
Irm mxmum I0Il ncI prcscnI vluc, sub|ccI I0 Ihc c0mpny's rcs0urcc
vlblIy. T0 chcvc Ihs, I s ncccssry I0 mxmsc Ihc ncI prcscnI vluc
(NP\) 0I Ihc pr0|ccI usng Ihc Icchnquc 0I lncr pr0grmmng 0r nIcgcr
pr0grmmng whcrc I s n0I p0ssblc I0 undcrIkc Ihc pr0|ccI n prIs.
A c0nsulI hs dcnIIcd Ihc I0ll0wng pr0|ccIs.
A (00,000) (00,000) 30240
(50,000) (00,000) 28070
C (200,000) 50,000 07,230
2
Pr0vdc mIhcmIcl pr0grmmng I0rmulI0n I0 sssI Ihc c0mpny n
ch00sng Ihc m0sI vblc pr0|ccI I cpIl vlblc I0r ycr 0 nd Ycr ! s
lmIcd I0 N70.000 nd N80,000 rcspccIvcly. Assumc 5 pcrccnI c0sI 0I
cpIl nd IhI Ihc pr0|ccIs rc dvsblc.
@ 5
0 (00,000) .00 (00,000)
(00,000) 0.952 (95,200)
2 302,40 0.907 274,28b
0 (50,000) .000 (50,000)
(00,000) 0.952 (95,200)
2 28,070 0.907 97,789
0 (200,000) .000 (200,000)
50,000 0.952 (42,800)
2 07,230 0.907 97,258
Mx: NP\ = N79,08bA + N52,589 + N40,058C
N00,000 A + N50,000 + N200,000C
s
N70,000
N00,000 A + N00,000
s
N80,000 + N50,000C
A, , C
s

A, , C
>
0
Thc b0vc cquI0n cn bc s0lvcd usng Ihc c0mpuIcr.
22
() \cry Icchncl.
(b) Cn 0nly bc s0lvcd wIh Ihc hclp 0I Ihc c0mpuIcr.
(c) \cry c0sIly I0 usc whcn lrgc ndvsblc pr0|ccIs rc nv0lvcd.
(d) !I ssumcs IhI IuIurc nvcsImcnI 0pp0rIunIcs rc kn0wn.
Thc I0ll0wng c0nsIIuIc Ihc lmII0ns 0I cpIl rI0nng:
() Thc ssumpI0n 0I dvsblIy 0I pr0|ccIs my n0I bc p0ssblc
n prcIcc, I0r ll pr0|ccIs
(b) Thc ssumpI0n 0I lncrIy bcIwccn 0uIlys nd NP\ 0I pr0|ccIs
my n0I h0ld bccusc 0I cc0n0mcs nd dscc0n0mcs 0I sclc.
(c) 0n mny 0ccs0ns cpIl rI0nng IrcIs pr0|ccIs n
s0lI0n. !I d0cs n0I rcc0gnsc Ihc nIcr dcpcndcncc 0I pr0|ccIs,
I0r cxmplc, n nvcsImcnI n pr0|ccI my rcsulI n
subsInIl svngs 0nly I n0Ihcr pr0|ccI s undcrIkcn, whch
cpIl rI0nng gn0rcs.
(d) whcrc m0rc Ihn Iw0 pr0|ccIs rc nv0lvcd nd cpIl s
rcsIrcIcd n m0rc Ihn 0nc pcr0d, Ihc pr0IIblIy ndcx
ppr0ch wll n0 l0ngcr bc suIIccnI I0r rcs0lvng pr0|ccI
cccpIncc undcr cpIl rI0nng. !n such cscs, lncr
pr0grmmng Icchnquc my bc pplcd.
Fnncl mngcrs rc 0IIcn c0nIr0nIcd wIh c0mplcx nvcsImcnI dccs0ns.
Exmplcs 0I such dccs0ns rclIc I0 dccs0ns 0n pr0|ccIs wIh dIIcrcnI lvcs,
rcplccmcnI 0I n cxsIng sscI nd cvluI0n 0I nvcsImcnIs n n
nIlI0nry cnvr0nmcnI.
Such dccs0ns nv0lvc puIIng nI0 c0nsdcrI0n prIculr IcI0rs IhI IIccI
Ihc cvluI0n 0I Ihc pr0|ccI. F0r cxmplc, Ihc IuIurc csh Il0ws 0I pr0|ccI
mghI hvc I0 bc d|usIcd I0r nIlI0n. Als0 n rcplccmcnI pr0blcm, s0mc
n0nqunIIIvc IcI0rs mghI nccd I0 bc sscsscd scprIcly bcI0rc Inl
dccs0n 0n whcIhcr 0r n0I I0 rcplcc s Ikcn.
!n mulIpcr0d Iunds c0nsIrnI pr0blcm, I s suIIccnI I0 I0rmulIc Ihc
pr0blcm. Thc 0pcrI0nl rcscrchcrs w0uld pr0IIcr s0luI0n.
23
0.9.
. !n Iypcl rcplccmcnI pr0blcm, Ihc mcIh0d I0 usc n Ihc cvluI0n
pr0ccss s:
A Thc bsc ncI prcscnI vluc mcIh0d
Thc nIcrnl rIc 0I rcIurn mcIh0d
C Thc pr0IIblIy ndcx mcIh0d
0 Thc pybck pcr0d mcIh0d
E Thc nnul cquvlcnI vluc mcIh0d
2. !n brngng n nIlI0n nI0 Ihc cpIl nvcsImcnI cvluI0n pr0ccss
whch 0I Ihc I0ll0wng s N0T IIccIcd by nIlI0n nd IhcrcI0rc gn0rcd!
A 0cncrl ncrcsc n scllng prccs
0cncrl ncrcsc n wgc rIcs
C 0cncrl ncrcsc n mIcrls unI prccs
0 Tx shcld 0n dcprccI0n
E 0cncrl ncrcsc n Ihc unI c0sIs 0I 0Ihcr npuIs.
3. !n mulIpcr0d cpIl rI0nng, whch 0I Ihcsc mcIh0ds s Ihc c0rrccI
mcIh0d I0 usc!
A NP\ 0I cch pr0|ccI
NP\ pcr nvcsImcnI n cch pr0|ccI
C Lncr pr0grmmng Icchnquc
0 !RR 0I cch pr0|ccI
E Pybck 0I cch pr0|ccI.
4. Thc c0rrccI ppr0ch I0 usc n rcIlccIng nIlI0n n Ihc IuIurc csh Il0w
0I pr0|ccI s ___________
() 0sc0unI m0ncy csh Il0ws I rcl dsc0unI rIc
() 0sc0unI rcl csh Il0ws I n0rml dsc0unI rIc
() 0sc0unI m0ncy csh Il0ws I n0rml dsc0unI rIcs
(v) 0sc0unI rcl csh Il0ws I rcl dsc0unI rIcs
A () nd ()
() nd ()
C () nd (v)
0 () nd (v)
E () nd (v)
5. whch 0I Ihc I0ll0wng s N0T lmII0n n cpIl rI0nng pr0blcms!
A AssumpI0n 0I dvsblIy 0I pr0|ccIs
AssumpI0n 0I lncrIy
C Thc IrcImcnI 0I cpIl pr0|ccIs n sInd l0nc bss
0 Thc lmII0n 0I pr0IIblIy ndcx s mcIh0d I0r rnkng
pr0|ccIs
E 0cIcrmnI0n 0I Ihc m0unI 0I cpIl undcr c0nsdcrI0n
24
0.9.2
. whI s Ihc mn mcIh0d I0 usc whcn cvluIng pr0|ccIs wIh dIIcrcnI
lvcs!
2. !n usng Ihc InIc h0rz0n mcIh0d 0I mkng cpIl cqupmcnI
rcplccmcnI dccs0ns, whI s Ihc m|0r dIIculIy!
3. whcn nc0rp0rIng nIlI0n nI0 Ihc cpIl nvcsImcnI pr0ccss I s
0IIcn ncccssry I0 clculIc Ihc rcl rIc. 0vc Ihc I0rmul I0r Ihs vrblc.
4. Thc cpIl nvcsImcnI dccs0n n whch ncw cqupmcnI s rcqurcd
bccusc 0I ncw Icchn0l0gy s __________ dccs0n.
5. SIIc Ihc mn dIIcrcncc bcIwccn hrd nd s0II cpIl rI0nng.
25
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ SIIc Ihc chrcIcrsIcs 0I AMT nvcsImcnIs,
+ Expln Ihc bs bcng lcvcllcd gnsI Ihc c0nvcnI0nl pprsl Icchnqucs
nd dvncc p0nIs I0 sh0w IhI Ihs bs s msplccd,
+ !llusIrIc Ihc usc 0I nc0rrccI Icchnquc nd nc0rrccI usc 0I c0rrccI Icchnquc
wIh pybck pcr0d nd ncI prcscnI vluc Icchnqucs,
+ HghlghI nd cxpln 0Ihcr p0ssblc sh0rIc0mngs n Ihc pplcI0n 0I pprsl
Icchnqucs,
+ SIIc Ihc sIcps n Ihc pprsl pr0ccss, nd
+ McnI0n Ihc mngcmcnI cI0ns IhI my mIgIc Ihc bs bcng rscd gnsI
mcIh0ds 0I pprsng AMT pr0|ccIs.
.
Thc c0nvcnI0nl pprsl Icchnqucs hvc bccn wdcly crIcscd I0r bcng
unIv0urbly dsp0scd I0wrds AMT pr0|ccIs. !I hd bccn clmcd IhI bccusc
0I Ihcr pcculr chrcIcrsIcs, Ihc pr0|ccIs wcrc bcng cxcludcd Ir0m Ihc
cpIl cxpcndIurc plns 0I c0mpncs n Ihcr sIrIcgc dccs0nmkng.
H0wcvcr, I s n0I Ihc pprsl Icchnqucs, , IhI rc I0 blmc I0r Ihs
bs, buI Ihc prcII0ncrs wh0 usc Ihc Icchnqucs. Ths bs musI hvc rscn
cIhcr bccusc:
() Thc prcII0ncrs usc n nc0rrccI Icchnquc, 0r
(b) Thcy nc0rrccIly usc Ihc rghI Icchnqucs.
2b
Thc I0ll0wng rc Ihc chrcIcrsIcs 0I AMT pr0|ccIs:
() !nIl c0sIs rc vcry hgh nd my bc sprcd I0r cxmplc 0vcr Iw0
ycrs,
(b) RcIurns rc gcncrIcd I0r vcry l0ng pcr0d 0I Imc, nd
(c) RcIurns gr0w 0vcr Ihc csImIcd lIc 0I Ihc pr0|ccI.
Thc rgumcnI hcrc, s IhI Ihc usc 0I n nc0rrccI Icchnquc prIculrly
pybck pcr0d, Icnds I0 cxcludc I0Illy s0mc bcncIIs, nd dccmphssc
0Ihcrs, Ir0m Ihc pprsl pr0ccss such IhI pr0|ccI w0uld bc rc|ccIcd whcn
pr0bbly I sh0uld hvc bccn cccpIcd. Ths, I s bclcvcd, w0uld 0pcrIc I0
Ihc dcIrmcnI 0I Ihc 0vcrll sIrIcgc 0b|ccIvc 0I Ihc c0mpny.
Pybck Pcr0d \crsus NcI PrcscnI \luc.
C0nsdcr Ihc I0ll0wng Iw0 pr0|ccIs X nd Y wIh Ihcr rclcvnI csh Il0ws:
End 0I ycr
Pr0|ccI X Pr0|ccI Y
( 'm) ( 'm)
0 (50) (20)
(40) 5
2 0 5
3 5 5
4 20 5
5 25
b 30
7 35
8 40
9 45
0 50
Pr0|ccI X s n AMT pr0|ccI whlc Pr0|ccI Y s cpcIy cxpns0n pr0|ccI.
whch pr0|ccI sh0uld bc sclccIcd usng:
() Pybck mcIh0d, nd
() NcI PrcscnI \luc (NP\) mcIh0d!
Assumc dsc0unI rIc 0I 5.
27
Usng pybck s mcIh0d 0I pprsl, pr0|ccI Y wll py IsclI bck n I0ur
ycrs whlc pr0|ccI X wll py IsclI bck n sx ycrs. As pr0|ccI Y wll py
bck IsclI IsIcr Ihn pr0|ccI X, pr0|ccI Y wll bc sclccIcd. H0wcvcr, I NP\
mcIh0d wcrc uscd, pr0|ccI X wll hvc ncI prcscnI vluc 0I 3.27mll0n
whlc pr0|ccI Y wll hvc ncgIvc ncI prcscnI vluc 0I 5.72 mll0n. !I Ihc
dsc0unI rIc 0I 5 rcprcscnIs Ihc shrch0ldcrs 0pp0rIunIy c0sI 0I cpIl,
pr0|ccI X wll bc sclccIcd s I wll dd 3.27mll0n I0 Ihc vluc 0I Ihc
busncss. !n Ihc c0nIcxI 0I shrch0ldcrs' wclIh mxmsI0n 0b|ccIvc,
pr0|ccI X w0uld bc supcr0r I0 pr0|ccI Y. Pybck pcr0d hd, IhcrcI0rc, bccn
wr0ngly uscd n Ihs csc.
()
ClculIng Ihc pybck pcr0ds
Pr0|ccI Y =
m 5
m 20
= 4 ycrs
0 (50) (50)
(40) (90)
2 0 (90)
3 5 (75)
4 20 (55)
5 25 (30)
b 30 0
7 35 35
8 40 75
9 45 20
0 50 70
Thc pybck pcr0d I0r pr0|ccI X s b ycrs IhI s Ihc ycr n whch
Ihc csh 0uIIl0ws cquIc Ihc csh nIl0ws.
28
()
ClculI0n
Pr0|ccI X
0 (50) .000 (50.00)
(40) 0.870 (34.80)
2 0 0.75b 0.00
3 5 0.b58 9.87
4 20 0.572 .44
5 25 0.497 2.43
b 30 0.432 2.9b
7 35 0.37b 3.b
8 40 0.327 3.08
9 45 0.284 2.78
0 50 0.247 2.35
0 (20) .000 (20.00)
5 0.870 4.35
2 5 0.75b 3.78
3 5 0.b58 3.29
4 5 0.572 2.8b
Thc clmcd bs bcng lcvcllcd gnsI Ihc dsc0unIcd csh Il0w Icchnqucs
(0CF) s csc m0rc 0I Inncl mngcmcnI prcIcc nd lcss 0I prncplc.
!n Ihs rcspccI, Ihc usc 0I unduly hgh dsc0unI rIc 0r prcdcIcrmncd nIcrnl
rIc 0I rcIurn rc w0rIhy 0I n0Ic.
0nc nc0rrccI wy 0I usng 0CF Icchnqucs s I0 d0pI n unduly hgh dsc0unI
rIc, I0r cxmplc 25, nd nppr0prIc Imc pcr0d. A vcry hgh rIc crcIcs
hghly unIv0urblc dsp0sI0ns I0wrd pr0|ccIs wIh l0ng cc0n0mc lvcs
s gnsI Ih0sc wIh sh0rI uscIul lvcs. Als0, unncccssrly hgh rIcs lm0sI
lwys rcsulI n ncgIvc rcsulIs, I0r pr0|ccIs 0I gr0wng csh Il0ws, nI0 Ihc
Ir dsInI IuIurc s gnsI pr0|ccIs wIh c0nsInI csh Il0ws 0vcr sh0rI
Imc spn.
F0r cxmplc, Ihc prcscnI vluc 0I N00 0bInblc n IIIccn ycrs Imc I
2 s 8.27 whlc I 25 s |usI 3.52. Smlrly sum 0I 00,000
29
rcccvcd cvcry ycr I0r Ihc ncxI IIIy ycrs I 2 wll bc w0rIh 399,990.
Ths sIuI0n n0rmlly dcIcrs mngcrs Ir0m sclccIng AMTlkc pr0|ccIs
nd nsIcd, Ihcy g0 I0r pr0|ccIs wIh c0nvcnI0nl cshIl0w pIIcrns (nIl
0uIly I Ihc bcgnnng 0I Ihc ycr I0ll0wcd by c0nsInI csh Il0ws 0vcr
sh0rI pcr0d 0I Imc).
!mpcI 0I dIIcrcnI lcvcls 0I dsc0unI rIcs 0n ncI prcscnI vluc.
An AMTIypc pr0|ccI hs Ihc I0ll0wng csh Il0w pIIcrns.
0 (45)
(5)
2 5
3 30
4 45
5 b0
Prcprc Iblc sh0wng Ihc NP\ 0I Ihc pr0|ccI ssumng b, 2 nd 30
dsc0unI rIcs, nd c0mmcnI s ppr0prIc.
w0rkngs @b
End 0I ycr
0 P\ 0I 45m = 45 x .0 (45,000)
P\ 0I 5m = 5m x 0.9434 (4,5)
2 P\ 0I 5m = 5m x 0.8900 3,350
3 P\ 0I 30m = 30m x 0.839b 25,88
4 P\ 0I 45m = 45m x 0.792 5,b45
5 P\ 0I b0m = b0m x 0.7473 44,838
@2
End 0I ycr
0 P\ 0I 45m = 45m x .0 (45,000)
P\ 0I 5m = 5m x 0.8929 (3,394)
P\ 0I c0sIs
2 P\ 0I 5m = 5m x 0.7972 ,958
3 P\ 0I 30m = 30m x 0.78 2,354
4 P\ 0I 45m = 45m x 0.b355 28,598
5 P\ 0I b0m = b0m x 0.5b74 34,044
P\ 0I bcncII 95,954
30
0 P\ 0I 45m = 45m x .0 45,000
P\ 0I 5m = 5m x 0.7b90 ,535
P\ 0I c0sIs
2 P\ 0I 5m = 5m x 0.5920 8,880
3 P\ 0I 30m = 30m x 0.4550 3,b50
4 P\ 0I 45m = 45m x 0.3500 5,750
5 P\ 0I b0m = b0m x 0.2b90 b,40
P\ 0I bcncIIs
b 9,02 59,5 59,870
2 95,954 58,394 37,5b0
30 54,420 5b,535 (2,5)
Fr0m Ihc Iblc, I wll bc 0bscrvcd IhI Ihc mpcIs 0I usng hghcr dsc0unI
rIcs crcIc rclIvc dsdvnIgc 0n bcncIIs whcn c0mprcd wIh c0sIs.
An ncrcsc n dsc0unIcd rIc Ir0m b I0 2, I0r cxmplc, dccrcscs Ihc P\
0I bcncIIs by 9.38 nd Ihc P\ 0I c0sIs by 0nly .28.
!n Ihc smc vcn, n ncrcsc Ir0m 2 I0 30 rcduccs bcncIIs by b0uI
43.29 buI cuI d0wn c0sIs by |usI 3.8. !I sh0uld bc n0Icd IhI I dsc0unI
rIc lcvcl 0I 30 Ihc pr0|ccI n Is cnIrcIy l00ks unpr0IIblc n Icrms 0I ncI
prcscnI vluc.
Thcsc rc:
()
Thc rsk prcmum, IhI s clculIcd nd ddcd I0 Ihc dsc0unI rIc I0
Ikc cc0unI 0I rsk, rcIlccIs Ihc I0Il rsk 0I Ihc pr0|ccI. Ths, h0wcvcr,
c0nIrdcIs Ihc submss0n 0I Ihc cpIl sscI prcng m0dcl (CAPM)
whch rcc0gnscs 0nly Ihc sysIcmIc rsk 0I pr0|ccI nd ssumcs
IhI rI0nl nvcsI0r w0uld hvc dvcrsIcd wy Ihc unsysIcmIc
c0mp0ncnI 0I Ihc I0Il rsk 0I Ihc pr0|ccIs. Thus Ihc pr0ccdurc I0r
clculIng Ihc rsk prcmum by mngcrs my unduly ncrcsc Ihc
dsc0unI rIc.
3
(b)
Mny l0ngIcrm nd vlublc bcncIIs 0I AMT pr0|ccIs mghI n0I bc
cpIurcd nd Ihcrc mghI bc Ilurc I0 scprIc rclcvnI Ir0m
rrclcvnI dI. RclcvnI dI such s ncrcmcnIl csh Il0ws nd
l0sI nc0mc Ir0m n lIcrnIvc mghI n0I bc I0cuscd up0n whlc
rrclcvnI dI such s dcprccI0n ( n0ncsh Icm), b00k vluc 0I
cqupmcnI, c0mmIIcd IuIurc c0sIs mghI bc ncludcd n Ihc Inncl
nlyss.
(c)
Thc bcncIIs ccrung I0 AMT pr0|ccIs hvc b0Ih Ingblc nd Ihc
cqully, buI n0I vsblc, nIngblc clcmcnIs. whlc Ihc Ingblc
bcncIIs rc usully c0rrccIly cvluIcd, Ihcrc rc n0 0b|ccIvc bscs
I0r mcsurng Ihc nIngblc bcncIIs.
Thcsc ncludc:
() P0ssblc svngs n nIcrcsI c0sIs, rcnI 0I wrch0usc spcc, nsurncc
c0sIs, nd s0 0n, s rcsulI 0I kccpng much l0wcr nvcnI0ry lcvcls.
(b) Svngs n nspccI0n c0sIs rsng Ir0m subsInIlly mpr0vcd
pr0ducI0n mcIh0ds (n0w hghly uI0mIcd).
(c) RcducI0n n scIup c0sIs rsng Ir0m AMT cqupmcnI's dpIblIy
I0 smllcr pr0ducI0n runs.
Thcsc ncludc:
() Thc unsccn nd unIclI p0sIvc cIIccIs 0n slcs rcvcnuc s rcsulI 0I
spccdy rcsp0nsc I0 cusI0mcrs rcqurcmcnI.
(b) Th0sc unqunIIblc mpr0vcmcnIs n qulIy IhI w0uld IIrcI
cusI0mcrs I0 Ihc pr0ducI nd cnhncc Ihc pr0ducI's c0mpcIIvcncss
n Ihc mrkcI.
(c) Shrp mpr0vcmcnIs n cmpl0yccs' sklls rsng Ir0m subsInIl
plnnng nd cducI0n.
Thc I0ll0wng rc Ihc sIcps nv0lvcd n Ihc pprsl 0I Iypcl AMT pr0|ccIs:
32
() Ensurng IhI Ihc pr0p0scd AMT nvcsImcnI IIs n wIh Ihc c0mpny's
sIrIcgc pln,
(b) C0nsIrucIng smplc 0CF, I0r cxmplc NP\ m0dcl 0I Ihc dccs0n
pr0blcm 0n hnd. !I Ihcrc s g0ng I0 bc cpIl rI0nng Ihs
c0nsIrnI, (ncludng Ihc ppr0prIc pr0grmmng mcIh0d) cn bc
bulI n,
(c) PrcdcIng Ihc rclcvnI qunIIblc csh Il0ws,
(d) Ch00sng Ihc m0sI ppr0prIc dsc0unI rIc nd Imc sclc bcrng
n mnd Ihc nccd I0 c0nsdcr sIrIcgc IcI0rs, nd
(c) ClculIng Ihc NP\ 0I Ihc pr0|ccI, usng 0nly Ihc csImIcd Ingblc
bcncIIs.
!I NP\ s p0sIvc, g0 hcd wIh Ihc pr0|ccI
!I NP\ s ncgIvc, dcnIIy nd crry 0uI crIcl nlyss 0I Ihc nIngblc
bcncIIs usng n grccd sc0rng sysIcm.
wcghng Ihc nIngblc bcncIIs by c0mprng Ihcm wIh Ihc sh0rIIll n
NP\. !I Ihc bcncIIs m0rc Ihn |usIIy Ihc sh0rIIll, Ihcn Ihc AMT cn bc
cccpIcd 0n sIrIcgc gr0unds dcspIc Is ncgIvc numcrcl vluc.
!I sh0uld bc n0Icd IhI Ihs sIcp rcqurcs I0p mngcmcnI vluc |udgcmcnI
s Ihc dccs0n hcrc nv0lvcs sIrIcgc Ihnkng. An lIcrnIvc, lIh0ugh
lcss cccpIblc, s I0 l0wcr Ihc dsc0unI rIc whcrc I s sIr0ngly bclcvcd
IhI Ihc nIngblc bcncIIs wcgh m0rc Ihn Ihc sh0rIIll n NP\.
As Ihc clmcd bs gnsI AMT pr0|ccIs s m0rc 0I mngcmcnI prcIcc,
Ihc I0ll0wng cI0ns my bc ncccssry I0 rcducc ncdcnccs 0I bs.
() T0p mngcmcnI sh0uld cnsurc IhI ndvdul mngcr's 0b|ccIvcs
rc lgncd s much s p0ssblc, wIh Ihc 0vcrll sIrIcgc g0l 0I Ihc
c0mpny. Ths s prIculrly rclcvnI n Ih0sc cIvIcs IhI cnc0urgc
sh0rIIcrmsm.
(b) whcrc Ihc 0rgnsI0n 0pcrIcs 0n Ihc bss 0I dvs0nl ccnIrcs,
Ihc ssuc 0I whI vluc I0 puI 0n dvs0nl IrnsIcrs 0I g00ds nd
scrvccs musI bc pr0pcrly cxmncd.
33
(c) 0I sh0uld bc crcIully gIhcrcd, nlyscd nd rcp0rIcd n such
wy IhI dccs0ns mdc 0n Ihc bss 0I Ihs dI d0 n0I crcIc bs
gnsI AMT pr0|ccIs nd rc n lnc wIh Ihc l0ngIcrm
c0mpcIIvcncss nd pr0IIblIy 0I Ihc c0mpny. Acc0unIng
nI0rmI0n sh0uld bc dccs0n 0rcnIcd.
(d) Thcrc sh0uld bc crcIul dclncI0n 0I qunIIblc dI Ir0m Ih0sc
rcqurng hgh vluc |udgcmcnI.
(c) AblIy I0 scgrcgIc rclcvnI dI, lcvng Ihc rrclcvnI, s n
mp0rInI nIbs clcmcnI n AMT nvcsImcnI pprsl.
(I) Thc rghI pprsl Icchnquc sh0uld bc sclccIcd.
(g) Thc sclccIcd Icchnquc sh0uld n0I bc nc0rrccIly uscd.
(h) Thc mcIh0d I0r dcIcrmnng Ihc rsk prcmum sh0uld n0I bc such s I0
crcIc bs gnsI AMT pr0|ccIs, cpIl sscI prcng m0dclbscd
rsk sscssmcnI sh0uld bc uscd.
() PcrI0rmncc mcsurcs IhI rc uscd sh0uld bc n lnc wIh Ihc
sIrIcgc 0b|ccIvcs 0I Ihc c0mpny. F0r cxmplc, Ihc b0nus sysIcm
IhI s 0pcrIcd sh0uld, s much s p0ssblc, bc lnkcd I0 Ihc NP\ 0I
nvcsImcnIs undcrIkcn.
(|) Hgh lcvcl nh0usc Irnng nd cducI0n musI bc c0nInul
cIvIy n Ihc c0mpny.
(k) SIII I ll lcvcls sh0uld bc cnc0urgcd I0 gvc mxmum c0mmImcnI
I0 Ihc pr0|ccI. PrIcpI0ry mngcmcnI wll bc nccdcd n 0rdcr I0
gcncrIc cccpIncc by mddlc mngcmcnI nd 0Ihcr sIII.
(l) MngcmcnI psychc sh0uld n0I bc ncgIvc. MnInng Ihc sIIus
0r |usI hvng Ihc bclcI IhI ncw mcIh0ds cnn0I w0rk sh0uld bc
I0Illy rcm0vcd Ir0m Ihc psychc 0I mngcmcnI I ll lcvcls.
Thc AMT pr0|ccIs rc such IhI Ihcy cn bc dscrmnIcd gnsI, unlcss I0p
mngcmcnI Ikcs dccs0ns IhI rc bscd 0n sIrIcgc gr0unds.
FrsIly, Ihcy rc vcry c0sIly n Icrms 0I csIblshmcnI nd mplcmcnII0n.
Scc0ndly, Ihcy hvc l0ng cc0n0mc lvcs. Thrdly, Ihcy hvc gr0wng pIIcrns
0I csh Il0ws. ThcrcI0rc, I crc s n0I Ikcn by I0p mngcmcnI, dccs0ns
mghI bc Ikcn I0wrds Ihc rc|ccI0n 0I s0mc pr0|ccIs whcn Ihc c0rrccI dccs0n
w0uld bc I0 cccpI Ihcm. Prncpl rcs 0I p0ssblc crr0rs by mngcmcnI
rc, n Ihc usc 0I wr0ng pprsl Icchnquc lkc Ihc pybck pcr0d 0r Ihc
34
wr0ng usc 0I rghI Icchnquc such s NP\. 0Ihcr rcs 0I p0ssblc
mngcmcnI crr0rs w0uld bc:
() ClculIng Ihc rsk prcmum (whch s n0rmlly ddcd I0 dsc0unI
rIc),
(b) !nblIy I0 cpIurc ll rclcvnI dI,
(c) UIlsI0n 0I nccurIc dI,
(d) 0IIculIy n mcsurng Ingblc qunIIblc dI,
(c) Exclus0n 0I nIngblc bcncIIs 0r mkng Ihcsc nIngblc bcncIIs
n0I rclly vlublc cvcn I Ihcy cxsIs, nd
(I) CrIclly dcIcrmnc Ihc l0ngrun c0mpcIIvcncss nd survvl 0I Ihc
c0mpny.
() AlgnmcnI 0I Ihc AMT pr0|ccI wIh Ihc sIrIcgc g0l 0I Ihc c0mpny,
(b) M0dcl c0nsIrucI0n 0I Ihc dccs0n pr0blcm,
(c) 0I gIhcrng nd nlyss, nd
(d) C0mpuII0n 0I Ihc NP\ 0I Ihc pr0|ccI.
whcrc Ihc NP\ s ncgIvc, Ihc pr0|ccI sh0uld 0nly bc cccpIcd I
nIngblc bcncIIs cxsI IhI m0rc Ihn c0mpcnsIc I0r Ihc Ill. !I
sh0uld bc n0Icd IhI Ihcsc bcncIIs, lIh0ugh cnn0I bc c0nvcrIcd
nI0 csh vlucs, cxsI nd musI I0r sIrIcgc rcs0ns, bc br0ughI nI0
Ihc pprsl pr0ccss.
As Ihc pr0blcm 0I bs lcvclcd gnsI pprsl Icchnquc 0I AMT
nvcsImcnIs s m0rc 0I prcIcc Ihn prncplc, I s mngcmcnI, Ihr0ugh
Ihcr cI0ns, IhI sh0uld mIgIc Ihs bs. Th0sc cI0ns ncludc, cnsurng
g0l c0ngrucncc, hvng Ihc rghI 0rgnsI0nl sIrucIurc, crcIul nd sIuIc
dI gIhcrng nd nlyss, sclccI0n 0I Ihc rghI Icchnquc, c0rrccI usc 0I
Ihc rghI mcIh0d, c0rrccI clculI0n 0I rsk prcmum, dcIcrmnI0n 0I Ihc
c0rrccI pcrI0rmncc mcIh0ds, hgh lcvcl 0I nh0usc Irnng nd cducI0n
nd s0 0n. As AMT pr0|ccIs musI bc mdc I0 w0rk, I0p mngcmcnI supp0rI
nd c0mmImcnI 0I mddlc mngcmcnI nd 0Ihcr sIII rc vcry mp0rInI.
35
.8.
. wh0 s I0 blmc I0r Ihc s0cllcd bs gnsI AMT pr0|ccIs
Ihc 0CF pprsl Icchnqucs 0r Inncl mngcrs wh0 usc Ihcsc
Icchnqucs!
() 0CF pprsl Icchnqucs
() Fnncl mngcrs
() 0CF nd Inncl mngcrs
A () 0nly
() nd ()
C () nd ()
0 () 0nly
E () nd ()
2. whch pprsl Icchnquc c0uld crcIc bs gnsI AMT pr0|ccIs!
() NP\
() Pybck pcr0d
() !RR
A () 0nly
() 0nly
C () 0nly
0 () nd ()
E () nd ()
3. whch 0I Ihc I0ll0wng s n0I dcIccncy n Ihc pplcI0n 0I 0CF
Icchnqucs I0 AMT pr0|ccIs!
A McIh0d cmpl0ycd n Ihc clculI0n 0I rsk Ircqucnccs
!ndcquIc nd nccurIc Ingblc dI
C !nc0rrccI mcsurcmcnI 0I Ingblc dI
0 Exclus0n 0I ccrIn nIngblc bcncIIs
E Usc 0I dsc0unI rIc
4. whI s Ihc IrsI sIcp n Ihc cvluI0n 0I AMT pr0|ccIs!
A ClculIc Ihc NP\ 0I Ihc bcncIIs
wcgh Ihc nIngblc bcncIIs
C Ensurc AMT pr0|ccI IIs n wIh Ihc 0vcrll sIrIcgc pln 0I Ihc
c0mpny
0 PrcdcI Ihc rclcvnI qunIIblc csh Il0ws
E C0nsIrucI smplc 0CF, prcscnI vluc m0dcl
3b
5. whch nvcnI0ry c0nIr0l m0dcl IIs n wIh Ihc AMT pr0|ccIs!
() sc E0 m0dcl undcr ccrInIy
() E0 m0dcl undcr unccrInIy
() 1usInImc m0dcl
A () 0nly
() nd ()
C () 0nly
0 () 0nly
E () nd ()
.8.2
. SIIc 0nc chrcIcrsIcs 0I dvnccd mnuIcIurng Icchn0l0gy (AMT)
pr0|ccIs wIh rcspccI I0 nIl nvcsImcnI.
2. SIIc 0nc nc0rrccI wy 0I usng 0CF pprsl Icchnquc
3. 0vc cxmplc 0I h0w wr0ng usc 0I c0rrccI pprsl Icchnquc c0uld
crcIc bs gnsI AMT pr0|ccIs.
4. !n Icrms 0I supp0rI I0r Inncl mngcrs, sIIc 0nc 0ccs0n Supp0rI
SysIcm (0SS) nlyIcl m0dcl IhI c0uld bc uscd I0r AMT pr0|ccIs.
5. !n Icrms 0I 0b|ccIvcs whI sh0uld I0p mngcmcnI d0 I0 rcducc bs
gnsI AMT pr0|ccIs!
37
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ EvluIc nvcsImcnI pr0|ccIs usng "CcrInIy EquvlcnI" mcIh0d,
+ Crry 0uI scnsIvIy nlyss 0I pr0|ccI's 0uIc0mcs,
+ ClculIc Ihc ExpccIcd NcI PrcscnI \luc (ENP\) 0I pr0|ccIs,
+ 0rw dccs0n Irccs wIh vcw I0 s0lvng IuIurc lIcrnIvc scqucnIl pr0blcm,
nd
+ 0scuss nd sIIc Ihc qulIIvc IcI0rs IIccIng cpIl nvcsImcnI dccs0ns.
UnccrInIy nd rsk nlyss n cpIl nvcsImcnI dccs0ns ply vIl
r0lc bccusc Ihc rcl cc0n0mc w0rIh 0I pr0|ccI cnn0I bc pr0pcrly
dcIcrmncd I Ihcy rc n0I c0nsdcrcd. s sIuI0n n whch vr0us
0uIc0mcs I0 dccs0n rc p0ssblc nd Ihc pr0bblIcs I0 Ih0sc lIcrnIvc
0uIc0mcs rc kn0wn. , 0n Ihc 0Ihcr hnd, dcscrbcs sIuI0n
whcrc Ihcrc s n0 such kn0wlcdgc 0I pr0bblIcs b0uI Ihc 0uIc0mcs. Rsk
nd unccrInIy n nvcsImcnI dccs0ns rsc bccusc 0I Ihc nblIy 0I Ihc
Inncl mngcr I0 I0rccsI Ihc p0ssblc IuIurc cvcnIs 0I Ihc pr0|ccI wIh
ccrInIy.
!n rcs0lvng Ihc ssuc 0I rsk nd unccrInIy, vr0us Icchnqucs rc pplcd
I0 nlysc Ihcr cIIccI 0n cpIl nvcsImcnI dccs0ns. S0mc 0I Ihc Icchnqucs
rc:
() Pybck pcr0d
(b) FnIc H0rz0n
(c) CcrInIy EquvlcnI
(d) Rsk Ad|usIcd 0sc0unI RIc
(c) ScnsIvIy Anlyss & SmulI0n
(I) ExpccIcd NP\
(g) SIndrd 0cvI0n nd \rncc
(h) C0cIIccnI 0I \rI0n
() 0ccs0n Trcc.
38
!n Ihc pybck pcr0d mcIh0d, Ihc sh0rIcr Ihc Imc rcqurcd I0 rcIurn Ihc
pr0|ccI's nIl 0uIly, Ihc bcIIcr. !n Is smplcsI I0rm, Ihc pybck mcIh0d
c0mplcIcly gn0rcs rcIurns IIcr Ihc pybck, Ihc dsIrbuI0n 0I rcIurns wIhn
Ihc pybck pcr0d, nd dsc0unI rIcs. Thc pybck pcr0d mcIh0d s bscd
0n Ihc rI0nlsI0n 0I "Ihc s00ncr, Ihc surcr" nd I0cuscs IIcnI0n 0n Ihc
ncr IuIurc, Ihcrcby cmphssng Ihc lqudIy 0I Ihc Irm Ihr0ugh Ihc crly
rcc0vcry 0I cpIl.
!n Ihc InIc h0rz0n mcIh0d, rcIurns bcy0nd prIculr dIc rc gn0rcd,
whlc rcIurns wIhn ccrIn pcr0d rc sub|ccIcd I0 nlyss. Thc l0ngcr
Ihc h0rz0n Ihc lcss Ihs wll mIIcr nd Ihc ncrcr Ihc mcIh0d bcc0mcs
sIrghI I0rwrd dsc0unIng csh Il0w mcIh0d.
Thc ssumpI0ns I0r usng Ihs mcIh0d rc s I0ll0ws:
() Csh Il0ws 0I IuIurc ycrs I0r c0nvcnI0nl pr0|ccIs w0uld n0rmlly
bc Ihc ncI csh nIl0ws.
(b) Thc nblIy I0 I0rccsI csh Il0ws 0I dsInI IuIurc ycrs s
unv0dblc
(c) Thc prcscnI vlucs 0I dsInI IuIurc csh Il0ws wll bc nsgnIcnI
nd mmIcrl sncc Ihcy wll Icnd I0 zcr0. F0r cxmplc, pr0|ccI
wIh Icn ycr lIc spn my bc cvluIcd wIh csh Il0ws 0I 0nly Ihc
IrsI Ivc ycrs.
Undcr Ihc ccrInIy cquvlcnI mcIh0d, rsk d|usIcd IcI0r kn0wn s
ccrInIy cquvlcnI c0cIIccnI s uscd I0 d|usI I0r Ihc rsk cIIccI n Ihc
pr0|ccI's csh Il0w. MulIplyng pcr0d's csh Il0w wIh Ihc c0cIIccnI
pr0duccs Ihc ccrInIy cquvlcnI csh Il0w whch s dsc0unIcd I0 pprsc
Ihc pr0|ccI.
A pr0|ccI c0sIs N70,000 nd I hs csh Il0ws 0I N40,000 N50,000 nd
N35,000 n ycrs I0 3. Assumc Ihc ccrInIy cquvlcnI c0cIIccnI rcc
csImIcd I0 bc .00, 0.85, 0.75 nd 0.b I0r ycrs 03, rcspccIvcly, nd Ihc
rsk Ircc dsc0unI rIc s 0. ClculIc Ihc ncI prcscnI vluc.
39
CcrInIy CcrInIy 0CF@0 P\
Yrs Csh Il0w EquvlcnI EquvlcnI
C0cIIccnI Csh Il0w
N N N
0 (70,000) .00 (70,000) .000 (70,000)
40,000 0.85 34,000 0.909 30,90b
2 50,000 0.75 37,500 0.82b 30,975
3 35,000 0.b0 2,000 0.75 5,77
Unlkc Ihc ccrInIy cquvlcnI mcIh0d whcrc d|usImcnI I0r Ihc rskncss 0I
pr0|ccI s d0nc 0n Ihc csh Il0w, n Ihc rsk d|usIcd dsc0unI rIc mcIh0d,
Ihc pr0|ccI rsk cIIccI s d|usIcd I0r n Ihc dsc0unIng rIc. F0r Ihc rskncss
0I pr0|ccI, rsk prcmum s dcIcrmncd nd ddcd I0 Ihc rskIrcc dsc0unI
rIc. !I, I0r nsIncc, Irm cvluIcs Is rskIrcc pr0|ccIs I 0 nd dcIncs
cxIr 5 I0r rsk prcmum, rsky pr0|ccIs wll bc cvluIcd I 5.
Ths mcns IhI:
RskAd|usIcd 0sc0unI RIc = Rsk Frcc RIc + Rsk Prcmum.
Ths mcIh0d s vlublc, prcIcl nd s wdcly uscd. ScnsIvIy nlyss s
prIculr knd 0I smulI0n n whch lmIng nd crucl vlucs 0I
pr0|ccI's prmcIcrs rc sccrIncd. Thc prmcIcrs wll usully bc Ihc
vlucs whch wll rcndcr NP\ I0 zcr0.
ScnsIvIy nlyss s mcsurc 0I Ihc mpcI 0I chngc n Ihc vluc 0I
0nc 0I Ihc pr0|ccI's vrblcs such s dsc0unI rIc, lIcspn, slcs v0lumc,
slcs prcc nd nnul Ixcd c0sI. Thc m0rc Ihc chngcs IhI 0ccur n Ihc
NP\, Ihc m0rc crucl Ihc prmcIcr 0I scnsIvIy nlyss I0 Ihc Irm.
F0r n nvcsImcnI pr0|ccI, Ihc I0ll0wng nIl csImIcs hvc bccn mdc:
!nIl 0uIly 0n cqupmcnI N00,000
Slcs prcc N30
UnI c0sI N20
0sc0unI rIc 0 pcr nnum
LIc 0I pr0|ccI 3 ycrs
Slcs v0lumc (unIs)
Ycr 4,000
Ycr 2 b,000
Ycr 3 3,000
40
Thc cqupmcnI wll mnuIcIurc pr0ducI I Ihc b0vcsIIcd unI c0sI nd
scllng prcc n Ihc v0lumcs ndcIcd. ClculIc Ihc mxmum I0lcrblc
unIv0urblc chngcs s pcrccnIgc 0I Ihc 0rgnl csImIcd vluc n:
() Slcs prcc
(b) UnI c0sI
(c) Slcs v0lumc
(d) !nIl 0uIly.
4,000 30 20,000 20 80,000 40,000
2 b,000 30 80,000 20 20,000 b0,000
3 3,000 30 90,000 20 b0,000 30,000
0 (00,000) .000 (00,000)
40,000 0.909 3b,3b0
2 b0,000 0.82b 49,5b0
3 30,000 0.75 22,530
8,450
Thus, Ihc pr0|ccI s w0rIhwhlc.
Mxmum I0lcrblc chngcs n:
()
00 x
Slcs T0Il 0I P\
NCF 0I NP\
=
NCF = NcI Csh Il0w (C0nIrbuI0n)
20,000 0.909 09,080
2 80,000 0.82b 48,b80
3 90,000 0.75 b7,590
00 x
325,350
8,450
=
=
4
Thc slcs prcc sh0uld n0I Ill by m0rc Ihn 2.b 0I N30 (whch s
78K). !I sh0uld I lcsI bc susIncd I N29.22K, 0Ihcrwsc Ihc pr0|ccI
wll n0I bc vblc.
(b)
00 x
C0sI \rblc 0I P\
NCF 0I NP\
=
P\ 0I vrblc c0sI
C0sI
80,000 0.909 72,720
2 20,000 0.82b 99,20
3 b0,000 0.75 45,0b0
00 x
2b,000
8,450
=
= 3.9
F0r Ihc pr0|ccI I0 rcmn vblc, Ihc unI c0sI 0I Ihc pr0ducI sh0uld n0I
Ill by m0rc Ihn 3.9. Thc vrblc c0sI sh0uld n0I bc lcss Ihn
N9.22 (N20 lcss 78k) pcr unI.
(c)
( )
00 x
0n C0nIrbuI 0I P\
NCF 0I NP\
=
Yrs C0nIrbuI0n 0CF@0 P\ 0I c0nIrbuI0n
N N
40,000 0,909 3b,3b0
2 b0,000 0,82b 49,5b0
3 30,000 0,75 22,530
00 x
08,450
8,450
=
= 7.79
N
N
N
N
42
Thc slcs v0lumc 0I Ihc pr0ducI sh0uld n0I bc rcduccd by m0rc Ihn
7.79 cvcry ycr I0r Ihc pr0|ccI I0 bc w0rIhwhlc.
(d)
=
( )
00 x
0uIly !nIl
NP\
00 x
00,000
8,450
=
= 8.45
F0r Ihc pr0|ccI I0 bc vblc, Ihc nIl 0uIly 0I Ihc pr0|ccI sh0uld n0I
ncrcsc by m0rc Ihn 8.45.
Ths s bscd 0n Ihc prncplc 0I cxpccIcd vluc. 0ncc pr0bblIcs rc
ssgncd I0 IuIurc 0uIc0mcs 0I ncI csh Il0w I0r pcr0d, Ihc cxpccIcd vluc
w0uld bc clculIcd nd dsc0unIcd. Thc cxpccIcd NP\ rIhmcIclly Ikcs
cc0unI 0I Ihc cxpccIcd vrblIy 0I Iw0 0r m0rc p0ssblc 0uIc0mcs by
vcrgng p0ssblc 0uIc0mcs wcghIcd by Ihcr rcspccIvc pr0bblIcs.
F0r cxmplc, pr0|ccI runs I0r Ihrcc ycrs wIh Ihc I0ll0wng dsIrbuI0n 0I
rcIurns n cch ycr, vz:
Ycr Ycr 2 Ycr 3
RcIurn Pr0bblIy RcIurn Pr0bblIy RcIurn Pr0bblIy
N'000 N'000 N'000
0,000 0. 20,000 0.4 0,000 0.3
2,000 0.b 30,000 0.b b,000 0.5
b,000 0.3 20,000 0.2
Thc pr0|ccI wll c0sI Ihc c0mpny N42 mll0n I0 csIblsh. ClculIc Ihc
cxpccIcd NP\ I Ihc dsc0unI rIc s 0.
N
N
43
Ycr Ycr 2
RcIurns Pr0bblIy ExpccIcd RcIurn Pr0bblIy ExpccIcd
\luc \luc
N'000 N'000 N'000 N'000
0,000 0. ,000 20,000 0.4 8,000
2,000 0.b 7,200 30,000 0.b 8,000
b,000 0.3 4,800
0,000 0.3 3,000
b,000 0.5 8,000
20,000 0.2 4,000
0 (42,000) .000 (42,000)
3,000 0.909 ,87
2 2b,000 0.82b 2,47b
3 5,000 0.75 ,2b5
Thc pr0|ccI csh Il0w gvcs p0sIvc NP\ 0I N2.558 mll0n,
IhcrcI0rc I s cccpIcd.
SIndrd dcvI0n s n bs0luIc mcsurc 0I rsk. !I mcsurcs Ihc dspcrs0n
0I csh Il0w 0r Ihc sprcd b0uI Ihc mcn vluc. Thc sIndrd dcvI0n 0I
NP\ ( )
NP\
S0 s gvcn by Ihc I0rmul:
( )

=
2
NP\
ENP\ NP\ S0
SIndrd dcvI0n s pr0xy mcsurc 0I I0Il rsk I0r Ihc nvcsImcnI nd
Ikcs n0 cc0unI 0I p0ssblc 0IIscIIng vrI0ns n 0Ihcr pr0|ccIs IhI my
bc undcrIkcn by Ihc smc nvcsI0r.
\rncc s Ihc squrc 0I sIndrd dcvI0n. !I s Ihc vcrgc squrcd
dcprIurc 0I NP\ Ir0m Is mcn vluc.
44
Supp0sc Irm hs I0 ch00sc bcIwccn Iw0 muIully cxclusvc pr0|ccIs IhI
c0sI N3 mll0n cch. Thc I0ll0wng rc Ihc p0ssblc ncI csh Il0ws 0I Ihc
pr0|ccI nd Ihcr ss0cIcd pr0bblIcs, vz:
0.0 3,000 0.0 2,000
0.20 3,500 0.25 3,000
0.40 4,000 0.30 4,000
0.20 4,500 0.25 5.000
0.0 5,000 0.0 b,000
0cIcrmnc Ihc sIndrd dcvI0n nd vrncc 0I cch pr0|ccI nd dvsc
whch 0I Ihcm s prcIcrblc.
ExpccIcd
Pr0bblIy NCF(x) \luc
( ) x x ( )
2
x x ( )
2
x x P
N'000 N'000 N'000 N'000 N'000
0. 3,000 300 (,000) ,000,000 00,000
0.2 3,500 700 (500) 250,000 50,000
0.4 4,000 ,b00 0 0 0
0.2 4,500 900 500 250,000 50,000
0. 5,000 500 ,000 ,000,000 00,000
ExpccIcd \luc (E\)
x
4,000 300,000
Pr0|ccI x ) S0 ( x
o
= = 0 300,000,00 N547,720
ExpccIcd
Pr0bblIy NCF(x) \luc
( ) x x ( )
2
x x ( )
2
x x P
N'000 N'000 N'000 N'000 N'000
0.0 2,000 200 (2,000) 4,000,000 400,000
0.25 3,000 750 (,000) ,000,000 250,000
0.30 4,000 ,200 0 0 0
0.25 5,000 ,250 ,000 ,000,000 250,000
0.0 b,000 b00 2,000 4,000,000 400,000
ExpccIcd vluc (E\)
x
4,000 ,300,000
Pr0|ccI ( ) = =
o
000 ,300,000, Y S0 Y N,40,80
N
N
45
Sncc b0Ih pr0|ccIs wll ycld Ihc smc ncI prcscnI vluc, Ihc Irm sh0uld
ch00sc Ihc pr0|ccI whch s lcss rsky. Ths s pr0|ccI X.
C0cIIccnI 0I vrI0n s rclIvc mcsurc 0I rsk. !I s smply Ihc rI0 0I
sIndrd dcvI0n 0I p0ssblc 0uIc0mc dvdcd by Is cxpccIcd vluc, dcpcIcd
by Ihc I0ll0wng I0rmul:
C0cIIccnI 0I vrI0n =
\luc ExpccIcd
0cvI0n drd In S
Usng llusIrI0n 24, c0mpuIc Ihc c0cIIccnI 0I vrI0n I0r Ihc Iw0
pr0|ccIs.
Pr0|ccI X
=
000 , 4
72 . 547
= 0.3b93
Pr0|ccI Y
=
000 , 4
8 . 40
= 0.2850
Usng Ihs c0nccpI, Ihc l0wcr rsk 0I pr0|ccI 'X' hs bccn c0nIrmcd.
Ths s mcIh0d 0I rcprcscnIng lIcrnIvc scqucnIl dccs0ns nd Ihc
p0ssblc 0uIc0mcs Ir0m Ihc I0rmcr, n grphcl I0rm. Sncc prcscnI
nvcsImcnI dccs0ns my hvc mplcI0ns I0r Ihc IuIurc nd Ihc 0uIc0mcs
0I Ih0sc chncc cvcnIs rc n0I kn0wn, Ihcn pr0bblIy dsIrbuI0n cn bc
ssgncd. 0ccs0n Ircc sh0ws Ihc rclI0nshp 0n IuIurc cvcnI nd Ihcr
c0nscqucnccs.
4b
A pr0|ccI hs n nIl 0uIly 0I N5 mll0n. RcIurn n Ycr s N3.5
mll0n wIh pr0bblIy 0I 0.4 0r N9 mll0n wIh pr0bblIy 0I 0.b. !I n
Ycr N9 mll0n rcIurn s gcncrIcd Ihcn n Ycr 2 Ihcrc cn bc N2 mll0n
(P=0.2) 0r N0.5 mll0n (P=0.8). !I Ihc IrsI ycr rcIurn hd bccn N3.5
mll0n, Ihcn n Ihc scc0nd ycr, Ihcrc s scvcnIcnIhs chncc 0I Nb mll0n
nd IhrccIcnIhs chncc 0I N.5 mll0n. Fnd Ihc c0cIIccnI 0I vrI0n
I Ihc dsc0unI rIc s 0.
0.4 Nb,000 0.7 0.28 (0.7 x 0.4)
N3,500 N,500 0.3 0.2 (0.3 x 0.4)
(N5,000) 0.b N2,000 0.2 0.2 (0.2 x 0.b
N9,000 N0,500 0.8 0.48 (0.8 x 0.b) v
All Igurcs rc n N'000
AlIcrnIvc
( )
( )
( )
( )
50 . 859 ,
.
500 , 0
.
000 , 9
) 000 , 5 ( !\
8 . 099 , 3
.
000 , 2
.
000 , 9
) 000 , 5 ( !!!
) b0 . 487 , (
.
500 ,
.
500 , 3
) 000 , 5 ( !!
40 . 23 , 2
.
000 , b
.
500 , 3
) 000 , 5 ( !
2
2
2
2
= + + =
= + + =
= + + =
= + + =
All Igurcs rc n N'000
N
N
N
47
Pr0bblIy NCF ExpccIcd
( ) x x ( )
2
x x
x \luc
N'000 N'000 N'000 N'000
! 0.28 2,23.40 b24.79 520.bb 27,08b.84
!! 0.2 (,487.b0) (78.5) (3,98.34) 0,229,378.7b
!!! 0.2 3,099.8 37.90 ,388.44 ,927,7b5.b3
!\ 0.48 ,859.50 892.5b 48.7b 22,29.54
x
= ,70.74
Pr0bblIy (xx)
2
P(xx)
2
0.28 27,08b.84 75,904.32
0.2 0,229,378.7b ,227,525.45
0.2 ,927,7b5.b3 23,33.88
0.48 22,29.54 0,b22.8
.00 ,545,383.83
\rncc = 0
2
NP\ =,545,383.830
( ) 830 ,545,383, S0
NP\
= o
= N,243.30 ppr0xmIcly
C0cIIccnI 0I vrI0n
740 , 70 ,
30 , 243 ,
= 0.72b7 ppr0xmIcly
!I s n0I smply Ihc usc 0I Ihc m0sI rcIcrrcd 0CF Icchnqucs (qunIIIvc
IcI0rs) IhI s mp0rInI n cpIl nvcsImcnI dccs0n, 0Ihcr prcIcl
c0nsdcrI0ns rc s cqully mp0rInI. Thcsc rc Ihc qulIIvc IcI0rs
nd |udgmcnI.
!n Ihc0ry, Ihc usc 0I s0phsIcIcd Icchnqucs (0CF, !RR nd s0 0n) s
cmphsscd sncc Ihcy mxmsc shrch0ldcrs wclIh. H0wcvcr n prcIcc,
c0mpncs gvc c0nsdcrblc mp0rIncc I0 qulIIvc IcI0rs.
RclblIy 0I Igurcs c0uld n0I bc chcvcd wIh0uI duc c0nsdcrI0n gvcn
I0 qulIIvc IcI0rs nd n Ihs rcspccI |udgmcnI plys sgnIcnI r0lc.
F0r cxmplc, vs0n 0I |udgmcnI 0I Ihc IuIurc plys n mp0rInI r0lc n IcI0rs
lkc mrkcI p0IcnIl, p0ssblIy 0I chngcs n Icchn0l0gy, Ircnd 0I
g0vcrnmcnI p0lccs nd s0 0n, whch rc |udgmcnIl. ThcrcI0rc, qulIIvc
IcI0rs nd |udgcmcnI g0 I0gcIhcr.
N
N
N
48
Thc qulIIvc IcI0rs I0 bc c0nsdcrcd n cpIl nvcsImcnI dccs0ns
ncludc:
() dpII0n I0 Ihc chngng mrkcI cnvr0nmcnI mrkcI p0IcnIl.
(b) Icchn0l0gcl dcvcl0pmcnI/chngc 0r 0bs0lcsccncc. Ths plys
sgnIcnI r0lc n gudng nvcsImcnI dccs0ns
(c) cmpl0yccs m0rlc nd sIcIy.
(d) pr0|ccIs' crIcl uIlIy n Ihc pr0ducI0n 0I mn pr0ducI.
(c) sIrIcgc mp0rIncc 0I cpIurng ncw pr0ducI IrsI.
(I) nvcsI0rs nd cusI0mcrs mgc.
(g) lcgl mIIcrs.
(h) c0mpcII0rs.
() rsk nv0lvcd n Ihc pr0|ccI I0 bc undcrIkcn.
(|) cpblIcs 0I mngcmcnI I0 c0pc wIh Ihc mplcmcnII0n 0I Ihc
pr0|ccI.
(k) c0nsumcr prcIcrcncc.
(l) nIlI0n.
(m) Ihc cnvr0nmcnI n whch Ihc pr0|ccI s I0 bc undcrIkcn.
Fnlly, 0CF nd 0Ihcr cvluI0n mcIh0ds rc gudcs. Thcrc s lIIlc vluc
n usng n nlyss IhI d0cs n0I c0nsdcr Ihc m0sI ppr0prIc lIcrnIvc
nd s0und ssumpI0ns. Rcs0urcc ll0cI0n s n0I smply mIIcr 0I ch00sng
Ihc m0sI pr0IIblc ncw pr0|ccIs, Ihcrc rc 0Ihcr IcI0rs IhI rc cqully
mp0rInI nd my IIccI Ihc Inl dccs0n. !I s IhcrcI0rc mp0rInI I0r
mngcmcnI I0 ls0 spcnd Imc mpr0vng Ihc qulIy 0I ssumpI0ns nd
ssurng IhI ll Ihc sIrIcgc qucsI0ns hvc bccn skcd bcI0rc Ikng Inl
dccs0n 0n cpIl nvcsImcnIs.
0ncc sIrIcgc qucsI0ns hvc bccn nswcrcd, nvcsImcnI pr0p0sls my bc
sub|ccIcd I0 0CF nd 0Ihcr nvcsImcnI Icchnqucs.
CpIl !nvcsImcnI Apprsl undcr unccrInIy nv0lvcs Ihc spccl pprsl
Icchnquc such s pybck pcr0d, InIc h0rz0n, ccrInIy cquvlcnI
scnsIvIy nlyss nd 0Ihcrs. All Ihcsc Icchnqucs rc mcIh0ds 0I
nc0rp0rIng rsk nI0 Ihc pprsl pr0ccss.
Undcr unccrInIy Ihc ppr0prIc dccs0n vrblc I0 usc n pr0|ccIs
pprsl, s Ihc cxpccIcd ncI prcscnI vluc (ENP\), Ihc sIndrd dcvI0n
nd vrncc 0I Ihc pr0|ccI.
49
!n cvluIng pr0|ccIs wIh scqucnIl 0uIc0mcs, I mghI bc m0rc nI0rmIvc
I0 usc dccs0n Irccs.
!n ddI0n I0 qunIIIvc IcI0rs, Inncc mngcrs sh0uld ls0 Iry I0 sscss
ny qulIIvc bcncIIs IhI ccruc I0 pr0|ccI bcI0rc Ikng Inl dccs0n.
2.3.
. 0nc wy 0I IcI0rng rsk nI0 Ihc cpIl budgcIng pr0ccss Ihr0ugh
d|usImcnI I0 Ihc csh Il0w s
. dcIcrmnng Ihc bcI 0I Ihc pr0|ccI
. usng rsk d|usIcd dsc0uI rIc
. usng ccrInIy cquvlcnI c0cIIccnI
A () l0nc
() l0nc
C () nd ()
0 () nd ()
E () nd ()
2. !n crryng 0uI scnsIvIy nlyss 0I pr0|ccI, whI s bcng IcsIcd s
__________________
() Thc mpcI 0I chngc n 0uIpuI 0n npuI
() Ihc mpcI 0I chngc n m0rc Ihn 0nc npuI vrblc I Imc
0n 0uIpuI
() Thc mpcI 0I chngc n 0nly 0nc snglc vrblc I Imc 0n
0uIpuI.
A () 0nly
() 0nly
C () nd ()
0 () nd ()
E () nd ()
A pr0|ccI's csh Il0ws rc s I0ll0ws:
Ycr 0: 0uIIl0w Nm, Ycr : nIl0w 0I N700,000 nd Ycr 2: nIl0w 0I Nb00,000.
Thcr ccrInIy cquvlcnI rc .0, 0.80 nd 0.70 rcspccIvcly. Thc pr0|ccI's
0pp0rIunIy c0sI 0I Iunds s 2.
3. ClculIc Ihcr ccrInIy cquvlcnI csh Il0ws
N N N
() ,000,000 (5b0,000) (420,000)
() (,000,000) 5b0,000 420,000
() ,000,000 5b0,000 420,000
50
A () 0nly
() nd ()
C () 0nly
0 () nd ()
E () nd ()
4. whI s Ihc pr0|ccI's ncI prcscnI vluc!
A P0sIvc NP\ 0I N75,79
NcgIvc NP\ 0I N75,79
C P0sIvc NP\ 0I Nb5,79
0 P0sIvc NP\ 0I N85,479
E NcgIvc NP\ 0I Nb5,79
5. whch s Ihc rclcvnI nlyIcl Icchnquc I0 usc whcn Ihc bcsI p0ssblc
vluc s bcng scrchcd I0r n 0uIpuI gvcn ccrIn c0nsIrnIs!
() TrgcIscckng nlyss
() whII nlyss
() 0pImsI0n nlyss
A () nd ()
() 0nly
C () 0nly
0 () nd ()
E () nd ()
2.3.2
. !n rclI0nshp I0 cpIl budgcIng, whI s Ihc dIIcrcncc bcIwcn rsk
nd unccrInIy!
2. !n Ihc c0nIcxI 0I pr0|ccIs nvcsImcnIs cvluI0n whI s ccrInIy
cquvlcnI!
3. SIIc 0nc wy 0I clculIng Ihc cxpccIcd ncI prcscnI vluc 0I pr0|ccI.
4. whI s dccs0n Ircc!
5. whI s Ihc pr0ccss nv0lvcd n smulI0n!
5
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ !dcnIIy, nd dscuss, Ihc mn s0urccs 0I l0ngIcrm Inncc,
+ SIIc, nd cxpln, Ihc kcy IcI0rs whch c0mpny sh0uld c0nsdcr whcn rsng
Inncc Ihr0ugh ssuc 0I l0n sI0cks,
+ SIIc, nd cxpln, Ihc kcy IcI0rs whch c0mpny sh0uld c0nsdcr whcn rsng
Inncc Ihr0ugh Ihc ssuc 0I prcIcrcncc shrcs,
+ SIIc, nd cxpln, Ihc m|0r IcI0rs whch c0mpny sh0uld c0nsdcr whcn
rsng cquIy Iunds, nd
+ Expln Ihc spccl nIurc 0I such ssucs s c0nvcrIblcs nd wrrnIs nd sIIc
Ihcr dvnIgcs I0 Ihc c0mpny ssung Ihcm.
SIrIcgc Inncng s m|0r IuncI0n 0I Inncl mngcrs n busncss
0rgnsI0ns. whlc Ihcy rcqurc sh0rIIcrm Inncc I0 supp0rI Ihcr
c0mpncs' w0rkng cpIl nccds, Ihcy sIrIcgclly scrch I0r Ihc ppr0prIc
l0ngIcrm Inncc(s) I0 cnblc Ihcm crry 0uI Ihcr sIrIcgc nvcsImcnI
IuncI0ns 0I ll0cIng cpIl rcs0urccs I0wrds Ixcd sscIs. Thc Inncc
mngcrs, n 0rdcr I0 IuncI0n cIIccIvcly nd cIIccnIly, nccd I0 kn0w ll
Ihc m|0r s0urccs 0I Iunds vlblc, Ihcr chrcIcrsIcs, Ihcr dvnIgcs
nd dsdvnIgcs b0Ih 0n sInd l0nc bss nd n rclI0n I0 0nc n0Ihcr.
Thc kn0wlcdgc 0I ll Ihc b0vc wll cnblc Inncc mngcr I0 l0cIc Ihc
rghI s0urcc, ch00sc Ihc chcpcsI s0urcc, blncc rsk nd rcIurn, nd sclccI
IhI s0urcc 0I Inncc IhI wll II n wIh Ihc sIrIcgc g0ls 0I Ihc Irm.
Thc m|0r s0urccs 0I sh0rIIcrm Iunds I0r c0mpncs rc Irdc crcdI, bnk
0vcrdrII, bnkcrs' cccpInccs (As) nd c0mmcrcl ppcrs. All Ihcsc
s0urccs hvc ccrIn c0mm0n chrcIcrsIcs: Ihcy pr0vdc lqudIy I0r
c0mpncs, p0sscss lIIlc 0r n0 rsk I0r Ihc lcndcrs nd Ihus pr0vdc rclIvcly
chcp s0urccs 0I Inncc I0r Ihc b0rr0wng c0mpncs.
52
Thcsc rc c0mmcrcl bnks' IclIcs whch, by rrngcmcnI, ll0w
c0mpncs I0 drw chcqucs n cxccss 0I whI Ihcy hvc n Ihcr currcnI
cc0unIs. A c0mpny, bscd 0n Is rsk pr0Ilc, my bc skcd I0 py
spccIcd pcrccnIgc I0r cxmplc 3 I0 5 0vcr Ihc prmc lcndng
rIc 0I Ihc lcndng bnk. Thcrc rc, ls0, Ixcd csIblshmcnI chrgcs
such s mngcmcnI Iccs pyblc 0n Ihc IclIy.
Thc c0sI 0I Iunds s usully l0w s nIcrcsI s 0nly pd 0n Iunds uscd
I0r Ihc pcr0d Ihc Iunds rc cIully uIlscd nd Ihc rIcs rc rclIvcly
l0w vsvs rIcs pyblc 0n l0ns.
0vcrdrII IclIcs hclp c0mpncs I0 c0vcr Icmp0rrly ncI csh
0uIIl0w sIuI0ns. H0wcvcr, n prncplc, Ihcy rc rcpyblc 0n
dcmnd. Ths s, n0 d0ubI, dsdvnIgc I0 Ih0sc c0mpncs IhI
usc 0vcrdrII IclIcs m0rc 0r lcss s pcrmncnI s0urcc 0I Inncc.
Ths s crcdI whch c0mpny Ikcs whcn I s ll0wcd I0 dcIcr
pymcnI I0r g00ds supplcd I0 I. As Ihc crcdI s n nhcrcnI prI 0I
ll crcdI IrnscI0ns, Ihcrc s, unlkc nIcrcsI 0n 0vcrdrII, n0 cxplcI
c0sI I0 Ihc Irm. !I csh dsc0unI s 0IIcrcd I0 Ihc c0mpny I0
cnc0urgc Ihc c0mpny I0 py crlcr Ihn grccd nd Ihc c0mpny
Ikcs dvnIgc 0I Ihs dsc0unI, Ihcrc s sIll n0 c0sI. H0wcvcr I Ihc
c0mpny d0cs n0I Ikc dvnIgc 0I Ihc dsc0unI, Ihcrc s c0sI IhI
s rcl.
Assumc IhI 3 csh dsc0unI s 0IIcrcd I0r pcr0d 0I 45 dys.
IhI s 3/5 ncI b0
ClculIc Ihc rcl c0sI 0I Iund!
Ths pr0ccss cn bc lkcncd I0 Ikng l0n 0I N97 I0r 45 dys I n
nIcrcsI c0sI 0I N3.
Thc c0mpny cn c0mprc Ihs rIc wIh nIcrcsI rIc 0n 0vcrdrII
nd dccdc whcIhcr 0r n0I I0 Ikc dvnIgc 0I Ihc csh dsc0unI. !I,
I0r cxmplc, Ihc c0mpny currcnIly pys 2 p.., I wll bc dvsblc
I0 Ikc dvnIgc 0I Ihc dsc0unI. Thc ssumpI0n hcrc s IhI Ihc
c0mpny w0uld b0rr0w I 2 p.., usc Ihc Iunds Ihcrcby rscd, I0
py Ihc crcdI0r crly cn0ugh I0 cn|0y nIcrcsI svngs 0I 25.0b p..
53
!I sh0uld bc n0Icd, Ir0m Ihc b0vc, IhI Irdc crcdI s n0I pcr sc, Ircc
s0urcc 0I Iunds.
whcrc Ihc crcdI Icrm s cxprcsscd s sy "3/5 ncI b0", I mcns IhI
Ihc pymcnI I0r g00ds supplcd cn bc dclycd I0r b0 dys. !I, h0wcvcr,
csh s pd wIhn 5 dys dsc0unI 0I 3 wll bc gvcn. Thc I0ll0wng
I0rmul cn Ihcn bc uscd:
pcr0d ds0unI dIc pymcnI
3b5
x
0sc0unI 00
0sc0unI

Thc rcl c0sI 0I Iunds cn bc clculIcd s I0ll0ws:
dys 45 I0r 09 . 3
97
3
3 00
3
= =

!I Ihs s cxprcsscd 0n n nnul bss, IhI s, nnulscd I bcc0mcs.

45
3b5
x 09 . 3 = 25.0b p. .
Fr0m Ihc p0nI 0I vcw 0I Ihc c0mpny, Ihc dvnIgcs 0I Irdc crcdI
ncludc:
() !I pr0vdcs nIcrcsI Ircc Iunds whcrc Ihcrc s n0 csh dsc0unI
0r n dvnIgc s Ikcn 0I csh dsc0unI whcn 0IIcrcd.
(b) Thc rrngcmcnI pys Ihc c0mpny n pcr0d 0I nIlI0n.
Thc dsdvnIgcs ncludc:
() P0ssblc hghcr prcc
(b) Thc c0mpny mghI hvc Ihc 0pp0rIunIy 0I pyng chcpcr I
mmcdIc scIIlcmcnI 0I IrnscI0n s mdc.
(c) L0wcr crcdI rIng. !I Irdc crcdI s buscd, Ihc c0mpny's
crcdI rIng mghI bc l0wcrcd. Supplcrs mghI subscqucnIly
bc dcmndng csh 0r sI0p supplcs.
(d) AdmnsIrIvc C0sIs. CrcdI Ikng usully nv0lvcs s0mc ppcr
w0rk wIh Is IIcndnI dmnsIrIvc nd cc0unI c0sIs.
54
(c) RcsIrcIvc C0vcnnIs. RcsIrcI0n my bc cmb0dcd n Ihc Irdc
crcdI grccmcnI, whch cll I0r mnmum 0rdcr szc, c0nInucd
pIr0ngc nd s0 0n.
Ths s Iypc 0I bnk Inncc nd I cnIls Ihc I0ll0wng sIcps:
() Thc bnk cnIcrs nI0 lcgl c0mmImcnI, wIh Ihc
c0mpny, I0 lcnd up I0 spccIcd m0unI 0I m0ncy I0r
n grccd pcr0d 0I Imc.
(b) scd 0n Ihc b0vc c0mmImcnI Ihc c0mpny ssucs
succcssvc pr0mss0ry n0Ics c0vcrng Ihc wh0lc m0unI
0I Ihc IclIy nd bcrng n nIcrcsI rIc lrcdy
grccd nd pcrhps lnkcd I0 Ihc CcnIrl nk 0I Ngcr
(CN) m0ncIry p0lcy rIc (MPR).
(c) Thc bnk undcrIkcs I0 scll Ihcsc n0Ics (c0mmcrcl
ppcr) n Ihc m0ncy mrkcI nd whcrc unsucccssIul
grccs I0 undcrwrIc Ihc ssuc by buyng Ihc n0Ics up
n Ihc mrkcI.
(d) Thc c0mpny grccs I0 py c0mmImcnI Icc 0I sy
pcr nnum 0n Ihc unuIlscd prI 0I Ihc spccIcd
m0unI I0r Ihc bnk's pr0msc I0 mkc Iunds vlblc.
Ths s bcsdcs Ihc nIcrcsI 0n Ihc m0unI 0I Ihc crcdI
cIully gvcn.
Thc Ilcxblc nIurc 0I Ihs I0rm 0I IclIy s Ihc m|0r
dvnIgc I0 Ihc c0mpny. Thc bnk my ls0 bcncII s I
gvcs Is cusI0mcr supp0rI IhI s unlkcly I0 hndcr Is
lqudIy.
Ths nsIrumcnI hs bccn dscusscd crlcr n Ihs pck undcr
m0ncy mrkcI nsIrumcnIs. C0mpncs usc As I0 Inncc b0Ih
d0mcsIc nd gl0bl Irdc.
Smlrly, Ihs sh0rIIcrm pr0mss0ry n0Ic hd bccn dscusscd
undcr m0ncy mrkcI nsIrumcnIs. !I sh0uld bc n0Icd h0wcvcr,
IhI I s m0rc cxpcnsvc wy 0I Inncng whcn c0mprcd
wIh bnkcr's cccpIncc.
55
E
!n lw, l0ngIcrm Inncc, s Inncng IhI s mdc vlblc I0r m0rc Ihn
0nc ycr. H0wcvcr, n prcIcc, Inncc undcr Ihs hcdng w0uld ncludc
mcdumIcrm nd l0ngIcrm. Thc clssIcI0n nI0 Imc pcr0ds sy 3 ycrs,
5 ycrs, 7 ycrs, 0 ycrs nd 25 ycrs wll dcpcnd 0n Ihc c0mpny.
Thc mn s0urccs 0I mcdum I0 l0ngIcrm Inncc rc l0n (dcbI) cpIl
prcIcrcncc shrc cpIl, 0rdnry (cquIy) shrc cpIl, c0nvcrIblcs nd
mcdumIcrm bnk crcdIs such s cqupmcnI Inncc, pr0|ccI Inncc nd
Inncc lcsc. Ech 0I Ihcsc s0urccs hs Is 0wn unquc chrcIcrsIcs whch
rc dscusscd cxccpI mcdumIcrm bnk crcdI whch wll bc dscusscd n
Ihc subscqucnI chpIcr.
Ths c0mprscs IxcdnIcrcsI, sccurcd l0n sI0cks (ls0 kn0wn s
dcbcnIurcs) ssucd by c0mpncs. Thc l0n sI0cks rc sd I0 bc
sccurcd by Ixcd chrgc 0n Ihc c0mpny's spccIc dcnIIblc
pr0pcrIy nd Il0Ing chrgc 0n ll Ihc sscIs 0I Ihc c0mpny, b0Ih
m0vblc nd mm0vblc.
A Il0Ing chrgc mcns IhI Ihc c0mpny cn c0nInuc I0 dcl wIh
Ihc sscIs chrgcd (IhI s buy 0r scll), c0llIcrsc Ihcm I0r IurIhcr
l0n unIl I d0cs s0mcIhng (I0r cxmplc, dcIulIs 0n nIcrcsI pymcnI
0r prncpl rcpymcnI) whch mkcs Ihc chrgc I0 crysIllsc. whcn
Ihs hppcns, Ihc c0mpny cn n0 l0ngcr dcl wIh Ih0sc sscIs.
0cbcnIurc h0ldcrs cn Ihcn scll s mny sscIs Ihcy rcqurc I0 rcdccm
Ihcr l0n.
A TrusI 0ccd s n0rmlly prcprcd I0 pr0IccI Ihc nIcrcsIs 0I Ihc
dcbcnIurc h0ldcrs. Thc TrusI 0ccd dcIncs Ihc rghIs 0I Ihc dcbcnIurc
h0ldcrs n csc 0I dcIulI, puI ccrIn rcsIrcI0ns 0n Ihc c0mpny (I0r
cxmplc lmI 0n Ihc IurIhcr m0unI 0I dcbI IhI cn bc rscd) nd
pr0vdcs I0r Ihc pp0nImcnI 0I rcccvcr. !I, I0r cxmplc, Ihc c0mpny
dcIulIs, rcccvcr wll bc pp0nIcd I0 scll Is sscIs nd rcmbursc
Ihc crcdI0rs I0 Ihc cxIcnI 0I Ihc m0unI 0wng.
Unsccurcd lcndcrs rc lcss pr0IccIcd, 0n dcIulI, Ihcy wll 0nly shrc
wIh 0Ihcr unsccurcd crcdI0rs.
3.3..
Thc I0ll0wng IcI0rs sh0uld bc c0nsdcrcd by Ihc c0mpny
whcn ssung l0n sI0cks:
5b
()
Thcsc rc l0w c0mprcd wIh c0sIs 0I ssung prcIcrcncc
0r 0rdnry shrcs.
(b)
Thc cxpccIcd rcIurn, n Icrms 0I nIcrcsI nc0mc nd
cpIl gr0wIh, s l0w bccusc nIcpIcd rsk by
lcndcrs s ls0 l0w. Ths mplcs IhI Ihc c0sI 0I Iunds I0
Ihc c0mpny s rclIvcly l0w vsvs 0Ihcr m|0r I0rms
0I Inncc.
(c)
!nIcrcsI musI bc pd whcIhcr 0r n0I Ihc c0mpny mkcs
pr0II. Ths my mpcI ncgIvcly 0n crnngs pcr
shrc (EPS) whch s n mp0rInI mcsurc 0I c0mpny's
pcrI0rmncc Ir0m Ihc sInd p0nI 0I cquIy
shrch0ldcrs. Als0, dcIulI 0n nIcrcsI pymcnI my
IIrcI sncI0n Ir0m crcdI0rs.
(d)
whcrc I s rcdccmblc l0n sI0cks ssuc, Ihc c0mpny
hs c0nIrcIul 0blgI0n I0 py bck Ihc prncpl
m0unI.
(c)
!nIcrcsIs, unlkc prcIcrcncc 0r 0rdnry shrc dvdcnds,
rc Ix dcducIblc. Thcy rc ll0wcd I0 bc chrgcd
gnsI pr0II bcI0rc Ixng such pr0II. Ths mkcs I I0
bc rclIvcly chcpcr s prcIcrcncc nd 0rdnry shrcs
dvdcnds rc ppr0prI0ns 0I pr0II.
(I)
Thc mngcrs' blIy I0 run Ihc IIrs 0I Ihc c0mpny
s lmIcd by Ihc rcsIrcIvc c0vcnnIs cnIrcnchcd n Ihc
TrusI 0ccd.
3.3.2 l
Ths s cpIl rscd Ihr0ugh ssuc 0I prcIcrcncc shrcs.
H0ldcrs rc rcgrdcd s prI0wncrs 0I Ihc c0mpny nd rc
cnIIlcd I0 Ixcd nc0mc n I0rm 0I dvdcnd nd rcccvc Ihs
57
nc0mc bcI0rc cquIy shrch0ldcrs gcI nyIhng. H0wcvcr,
unlkc nIcrcsI pymcnI, Ihc h0ldcrs nccd n0I bc pd.
N0IwIhsIndng, whcrc Ihc shrcs rc cxprcsscd I0 bc
cumulIvc, ll prcv0usly unpd dvdcnds musI bc pd bcI0rc
Ihc 0rdnry shrch0ldcrs.
0n lqudI0n 0I Ihc c0mpny, prcIcrcncc shrch0ldcrs, sub|ccI
I0 Ihc pr0vs0ns 0I Ihc ArIclcs, rc cnIIlcd I0 rcIurn 0I cpIl
bcI0rc 0rdnry shrch0ldcrs.
3.3.2.
Thc I0ll0wng IcI0rs sh0uld bc c0nsdcrcd by Ihc
c0mpny whcn ssung prcIcrcncc shrcs:
()
Thcsc rc lkcly I0 bc m0rc Ihn c0sIs 0I ssung
l0n sI0cks buI lm0sI Ihc smc s Ih0sc ncurrcd
whcn rsng cquIy Inncc.
(b)
Thcsc rc lkcly I0 bc m0rc Ihn Ih0sc 0I lcndcrs
buI lcss Ihn Ih0sc 0I Ihc 0rdnry shrch0ldcrs.
Ths s bccusc, n Icrms 0I rsk, prcIcrcncc shrcs
rc rcgrdcd by Ihc mrkcI s m0rc rsky Ihn
l0n sI0ck buI lcss rsky Ihn 0rdnry shrcs.
(c)
Thc c0mpny nccds n0I py dvdcnd s Ihc lw
d0cs n0I c0mpcl Ihc c0mpny I0 py prcIcrcncc
dvdcnd.
(d)
whcrc Ihc ssuc s rcdccmblc, cpIl musI bc
rcIurncd I mIurIy. whcrc I s rrcdccmblc,
Ihc h0ldcrs 0I prcIcrcncc shrcs rc n smlr
p0sI0n wIh 0rdnry shrch0ldcrs.
(c)
PrcIcrcncc dvdcnds rc n0I Ix dcducIvc. Thcy
rc n ppr0prI0n 0I pr0II.
58
()
PrcIcrcncc shrch0ldcrs hvc n0 rghI I0 v0Ic.
Thcy my v0Ic 0nly whcn Ihcr dvdcnds rc n
rrcrs.
Ths s cpIl rscd Ihr0ugh Ihc ssuc 0I 0rdnry shrcs.
H0ldcrs rc Ihc 0wncrs 0I Ihc Irm nd cxcrcsc Ihc ulImIc
c0nIr0l 0vcr I. Thcy bcr Ihc grcIcsI rsk s Ihcy my 0r my
n0I rcccvc dvdcnds nd Ihcr cpIl my bc prIlly 0r
I0Illy l0sI.
whlc Ihc Irm s 'g0ng c0nccrn' Ihcy rc Ihc lsI I0 rcccvc
nc0mc nd whlc 0n lqudI0n Ihcy 0ccupy Ihc b0II0m 0I Ihc
lsI n Icrms 0I cpIl rcplccmcnI.
H0wcvcr, I Ihc c0mpny s succcssIul, 0rdnry shrch0ldcrs
gn subsInIlly s Ihcy Ikc Ihc rcsdul nc0mc IIcr ll
0Ihcr nIcrcsIs hvc bccn sIsIcd nd ls0 Ikc Ihc blncc
0I cpIl 0n lqudI0n.
0rdnry shrch0ldcrs hvc v0Ing rghIs whch Ihcy usc I
nnul gcncrl mccIngs I0 cxcrcsc c0nIr0l 0vcr Ihc c0mpny.
Lcndcrs hvc n0 such v0Ing rghIs nd prcIcrcncc shrch0ldcrs
hvc lmIcd v0Ing rghIs s Ihcy rc 0nly ll0wcd I0 v0Ic whcn
Ihcr dvdcnds rc n rrcrs.
3.3.3.
Thc I0ll0wng IcI0rs sh0uld bc c0nsdcrcd whcn ssung
0rdnry shrcs:
()
Th0sc c0sIs IlucIuIc, dcpcndng 0n Ihc ssuc
mcIh0d uscd nd Ihc m0unI rscd n Ihc
mrkcI. Thc c0sIs 0I rsng cquIy Inncc rc
vcry hgh whcn Ihcy rc c0mprcd wIh rghIs
ssuc c0sI nd zcr0 cxplcI c0sI 0I rcIcnI0n.
(b)
Thc rcIurns rcqurcd (0r cxpccIcd) by Ihc cquIy
shrch0ldcrs rc vcry hgh n Icrms 0I dvdcnds
59
nd cpIl gr0wIh (cpIl pprccI0n). Ths
s, bccusc Ihcy prcsumbly bcr Ihc grcIcsI
rsk.
(c)
Thcrc s n0 c0mmImcnI by Ihc c0mpny I0 py
dvdcnds, sncc Ihcrc s n0 lcgl 0blgI0n I0 d0
s0. 0vdcnds cn 0nly bc dcclrcd I Ihc nsIncc
0I Ihc drccI0rs, lIh0ugh ppr0vl wll c0mc Ir0m
Ihc 0rdnry shrch0ldcrs. !I s 0nly 0n lqudI0n
IhI c0mpny s 0blgcd I0 py dvdcnd whcrc
Ihc Inl p0sI0n 0I Ihc lqudIcd c0mpny
pcrmIs I.
(d)
Thc c0mpny hs n0 0blgI0n I0 rcpy cpIl
cxccpI whcn Ihc c0mpny s n lqudI0n.
(c)
0rdnry shrc dvdcnds, lkc prcIcrcncc
dvdcnds, rc n0I Ix dcducIblc. Ths mkcs
dvdcnds m0rc cxpcnsvc, s c0sI 0I Iunds, Ihn
nIcrcsI, cvcn wIh0uI c0nsdcrng rsk.
(I)
Ncw ssuc 0I 0rdnry shrcs I0 Ihc gcncrl publc
my shII v0Ing p0wcr Ir0m Is prcscnI shrc nd
p0ssbly dluIc c0nIr0l 0vcr Ihc c0mpny.
(g)
Prcng s crIcl IcI0r whcn rsng ncw
cpIl Ir0m Ihc gcncrl publc. 0vcrprcng 0I
sccurIcs my n0I IIrcI cn0ugh buycrs whlc
undcrprcng my n0I brng cn0ugh Iunds I0r Ihc
c0mpny I0 cxccuIc Is pr0grmmc.
(h)
Rsng 0I cpIl v Ihc gcncrl publc cn bc
lcss succcssIul Ihn Ihr0ugh rghIs ssuc.
b0
Thcsc rc Ixcdnc0mc sccurIcs (l0n sI0cks 0r prcIcrcncc shrcs)
0I c0mpny whch cn bc c0nvcrIcd durng spccIcd IuIurc pcr0d
0I Imc nI0 Ihc 0rdnry shrcs 0I IhI c0mpny I prcdcIcrmncd
prcc I Ihc 0pI0n 0I Ihc h0ldcr. As Ihc prncplc nv0lvcd n cch 0I
Ihc b0vc cIcg0rcs 0I nsIrumcnIs s Ihc smc, subscqucnI dscuss0n
wll ccnIrc 0n c0nvcrIblc l0n sI0cks, whch s m0rc c0mm0n Ihn
c0nvcrIblc prcIcrcncc shrcs.
Thcsc rc n0rml l0n sI0cks wIh ll Ihcr chrcIcrsIcs buI
crryng Ihc ddI0nl IcIurc 0I Ihc rghI I0 c0nvcrI nI0
0rdnry shrcs. Ths rghI, kn0wn s c0nvcrs0n rghI, s
n0rmlly cxprcsscd n Icrms 0I c0nvcrs0n prcc 0r c0nvcrs0n
rI0.
()
Ths s Ihc pr (n0mnl) vluc 0I cch unI 0I l0n sI0ck
IhI wll c0nvcrI nI0 0nc 0rdnry shrc. Thc c0nvcrs0n
prcc cn bc scI such IhI I ncrcscs 0vcr Imc I0 mIch
cxpccII0ns rcgrdng ncrcsc n IuIurc shrc prcc.
Thus N000 pr vluc l0n sI0ck mghI hvc, I0r cch
0rdnry shrc, c0nvcrs0n prcc 0I N00 0I sI0ck n
IrsI Iw0 ycrs, N0 n Ihc ncxI Iw0 ycrs nd N20 n
Ihc Ihrd Iw0ycr pcr0d. Ths mcns IhI s Ihc
c0mpny m0vcs nI0 Ihc IuIurc, Icwcr shrcs wll bc
cxchngcd I0r 0nc unI 0I l0n sI0ck. C0nvcrs0n prcc
cn ls0 bc scI such IhI d|usImcnI c0uld bc mdc I0r
shrc splI 0r dvdcnd IhI s dcclrcd IIcr Ihc
c0nvcrIblc s s0ld.
(b)
Ths s Ihc qunIIy 0I 0rdnry shrcs IhI wll bc
cxchngcd I0r cch unI 0I l0n sI0ck. Thc c0nvcrs0n
rI0 my bc spccIclly sIIcd 0r cn bc w0rkcd 0uI
Ir0m Ihc c0nvcrs0n prcc whch cn bc scI I
pcrccnIgc 0vcr nd b0vc Ihc currcnI mrkcI prcc.
b
L & K Plc hs |usI ssucd I pr N50 mll0n, 5 c0nvcrIblc l0n
sI0cks n unIs 0I N,000 cch. Thc c0nvcrs0n Icrms ll0w N5000 0I
sI0ck I0 bc c0nvcrIcd nI0 00 N 0rdnry shrcs.
ClculIc Ihc c0nvcrs0n prcc nd Ihc c0nvcrs0n rI0.
00 0rdnry shrcs wll cxchngc I0r= N5,000
0rdnry shrc =
00
5000
= N50
N5,000 l0n sI0ck = 00 0rdnry shrcs
N L0n SI0ck =
5,000
00
0rdnry shrcs
N000 l0n sI0ck =

0rdnry shrcs
ThI s, 20 shrcs wll bc rcccvcd = 20 shrcs Ir0m Ihc c0nvcrs0n 0I
cch N,000 0I l0n sI0ck
(c)
Ths s Ihc mrkcI vluc 0I Ihc qunIIy 0I shrcs nI0
whch unI 0I l0n sI0ck wll bc c0nvcrIcd. !I cn bc
cxprcsscd s c0nvcrs0n rI0 Imcs mrkcI prcc 0I shrc
I Ihc Imc 0I ssuc. Thus ssumng Ihc currcnI mrkcI
prcc s N40, Ihc c0nvcrs0n vluc usng Ihc b0vc
llusIrI0n wll bc N40 x 20 = N800.
Thc c0nvcrs0n vluc wll bc bcl0w Ihc vluc 0I Ihc
c0nvcrIblc sI0ck I Ihc dIc 0I ssuc buI wll bc cxpccIcd
I0 ncrcsc 0vcr Imc bccusc Ihc mrkcI prcc 0I Ihc
shrc s cxpccIcd I0 ncrcsc s Ihc dIc I0r c0nvcrs0n
ppr0chcs.
(d)
Ths s Ihc dIIcrcncc bcIwccn Ihc ssuc vluc 0I Ihc
c0nvcrIblc sI0ck nd Is c0nvcrs0n vluc I Ihc dIc 0I
N
N
N
N
b2
ssuc. !I cch unI 0I N000 c0nvcrIblc s ssucd I pr
Ihcn Ihc ssuc vluc wll bc N000. Thc c0nvcrs0n
prcmum wll bc N000 N800, whch s cqul I0 N200
0r s I s d0nc m0rc IrcqucnIly
00 x
800
800 000
whch s cqul I0 25
Ths cn ls0 bc cxprcsscd s:
( ) rI0 C0nvcrs0n x
ssuc 0I dIc Ihc
I shrc 0I prcc MrkcI prcc C0nvcrs0n
|
|
.
|

\
|
Usng Ihc b0vc Igurcs, Ihs wll bc (N50 N 40) x 20
= N 200.
A c0mpny wll cndcv0ur I0 ssuc c0nvcrIblc l0n
sI0ck wIh s much prcmum s p0ssblc by scIIng
hgh c0nvcrs0n prcc 0r l0w c0nvcrs0n rI0. Thc
c0mpny, by d0ng Ihs, wll bc blc I0 ssuc l0w numbcr
0I ncw shrcs I0r gvcn m0unI 0I cpIl rscd.
Thc I0ll0wng rc Ihc dvnIgcs IhI ccruc I0 c0mpny
whch Innccs Is 0pcrI0ns Ihr0ugh Ihc ssuc 0I c0nvcrIblc
l0n sI0cks.
()
!n pcr0d 0I hgh nIcrcsI rIcs, Ihc c0mpny my bc
blc I0 v0d unduly hgh nIcrcsI pymcnIs. !I cn ssuc
c0nvcrIblc sI0ck I l0wcr rIc Ihn ssung Ihc sIrghI
l0n sI0ck I Ihc hgh currcnI nIcrcsI rIc bccusc 0I
Ihc c0nvcrs0n rghI. Thc grcIcr Ihc vluc 0I Ihs rghI
I0 nvcsI0rs, Ihc l0wcr Ihc scrvcng c0sI Ihc c0mpny
hs I0 py n 0rdcr I0 scll Ihc ssuc.
(b)
A c0mpny wh0sc rIng by lcndcrs s vcry p00r mghI
n0I bc blc I0 rsc Ihc sIrghI l0ng Icrm dcbI. !I,
h0wcvcr, I hs g00d gr0wIh p0IcnIls, I cn sIll
N N
N
b3
succcssIully rsc Inncc v Ihc ssuc 0I c0nvcrIblcs.
Thc mrkcI vcws Ihc ssuc Ir0m Ihc sInd p0nI 0I Is
qulIy s 0rdnry shrcs rIhcr Ihn Is qulIy s
"sIrghI".
(c)
!n pcr0d 0I IghI m0ncIry c0ndI0ns, Ihc pr0spccI 0I
shrng n Ihc IuIurc pr0IIs 0I Ihc c0mpny my
cnc0urgc nvcsI0rs I0 puI Ihcr m0ncy n I.
(d)
whcrc Ihcrc s mrkcI mclId0wn nd prccs rc
dcprcsscd, c0nvcrIblcs 0IIcr n lIcrnIvc s0urcc 0I
cpIl I0 0rdnry shrcs. Thc c0mpny mghI n0I wnI
I0 ssuc shrcs I vcry l0w prccs s cn0ugh Iunds wll
n0I bc rcccvcd I0r Is pr0grmmcs.
(c)
Rsng cpIl Ihr0ugh c0nvcrIblc sI0ck rIhcr Ihn
Ihr0ugh 0rdnry shrcs crcIcs lcss dluI0n n crnngs
pcr shrc. whlc Ihc c0nvcrs0n prcc s usully scI hghcr
Ihn Ihc currcnI mrkcI prcc 0I Ihc shrc, Ihc prcc 0I
Ihc ncw ssuc 0I 0rdnry shrcs s usully l0wcr n 0rdcr
I0r Ihc ssuc I0 bc succcssIul n Ihc mrkcI. Fcw numbcrs
0I shrcs rc c0nscqucnIly mdc n Ihc csc 0I
c0nvcrIblcs whlc m0rc shrcs rc ssucd n Ihc csc 0I
ncw ssuc 0I 0rdnry shrcs.
(I)
C0nvcrIblcs, s gnsI ncw shrcs, cn bc uscd s
Inncng sIrIcgy. MngcmcnI my, duc I0 symmcIry
0I nI0rmI0n bc blc I0 sscss Ihc IuIurc p0IcnIl 0I
Ihc c0mpny bcIIcr Ihn Ihc mrkcI. Thcy IhcrcI0rc ssuc
c0nvcrIblcs n0w, s0 IhI I Ihcr cxpccII0ns mIcrlsc,
Ihc shrc prcc w0uld rsc. !I sh0uld bc n0Icd IhI Ihs
bcncII hngcs 0n Ihc blIy 0I mngcmcnI I0 sscss
Ihc IuIurc m0rc c0rrccIly Ihn Ihc mrkcI.
3.3.5
A wrrnI, ls0 kn0wn s subscrpI0n rghI, s rghI I0 buy
ncw shrcs 0I c0mpny, durng spccIcd pcr0d n IuIurc,
I prcc dcIcrmncd n0w. Ths prcc s kn0wn s cxcrcsc prcc.
b4
wrrnIs rc n0rmlly ssucd by Ihc c0mpny s prI 0I Ihc
ssuc 0I unsccurcd l0n sI0cks I0 cI s 'swccIncrs' I0r such
sI0cks, IhI s, I0 mkc Ihcm m0rc mrkcIblc.
Thc I0ll0wng rc Ihc slcnI IcIurcs 0I wrrnI:
()
Ths s Ihc numbcr 0I shrcs whch Ihc h0ldcr 0I Ihc
wrrnI s cnIIlcd I0 buy I0r cch wrrnI. Ths s
n0rmlly sIIcd n Ihc wrrnI IsclI I I0r cxmplc
I0r .
(b)
Ths s Ihc cxcrcsc prcc whch s prcdcIcrmncd nd
Ixcd. H0wcvcr, I my bc sIcppcd up 0vcr Imc durng
Ihc cxcrcsc pcr0d (Ihc pcr0d durng whch Ihc rghI
cn bc cxcrcscd). !I my bc sIIcd, I0r cxmplc, s N0
pcr shrc unIl prIculr dIc nd N.25 pcr shrc
unIl Ihc cxpry dIc. Thc cxcrcsc prcc s n0rmlly scI
I Ihc Imc 0I Ihc ssuncc 0I Ihc wrrnI, 0vcr nd b0vc
Ihc mrkcI prcc 0I 0rdnry shrc 0I Ihc c0mpny. Ths
prcmum my bc, 5 pcrccnI b0vc Ihc shrc prcc. !I
Ihc cxcrcsc prcc s scI, I0r nsIncc I N5, I mcns
Ihc h0ldcr musI py N5 pcr shrc n 0rdcr I0 cxchngc
0nc wrrnI I0r 0nc shrc.
(c)
0ncc ssucd, wrrnIs rc Irdcd 0n Ihc sI0ck mrkcI,
ndcpcndcnIly 0I Ihc l0n sI0ck undcrlyng Ihcr ssuc.
(d)
H0ldcrs rc n0I cnIIlcd I0 ny csh dvdcnds pd 0n
0rdnry shrcs nd Ihcy hvc n0 v0Ing p0wcr. H0wcvcr,
Ihc cxcrcsc prcc s usully d|usIcd I0 Ikc crc 0I ny
shrc splI 0r dcclrcd dvdcnd.
3.3.5.
()
Thc c0mpny s blc I0 py l0wcr nIcrcsI rIc bccusc
0I Ihc 0pp0rIunIy I0 shrc n Ihc IuIurc pr0spccIs 0I Ihc
c0mpny by nvcsI0rs.
b5
(b)
RcsIrcI0ns plccd 0n Ihc c0mpny rc lcss scvcrc I0r
Ihc smc rcs0n b0vc.
(c)
Thc c0mpny wll bc blc I0 rsc ncw l0ns wIh lcss
dIIculIy.
(d)
wrrnIs, whcn cxcrcscd, wll dd I0 Ihc cquIy bsc 0I
Ihc c0mpny. Ths wll ncrcsc Ihc c0mpny's blIy I0
rsc ncw l0n sI0ck cvcn whcn Ihc 0rgnl l0n s sIll
I0 bc rcpd.
(c)
Csh 0uIIl0w 0I dvdcnds cn bc dclycd unIl IuIurc
Imc whcn Ihc c0mpny s, prcsumbly, n Innclly
c0mI0rIblc p0sI0n.
Thc vr0us s0urccs 0I sh0rIIcrm nd l0ngIcrm Inncc hvc bccn dscusscd.
Thc c0mm0n chrcIcrsIcs 0I sh0rIIcrm Iunds rc l0w rcIurn I0 Ihc nvcsI0rs
(nd IhcrcI0rc l0w c0sI I0 Ihc c0mpny), l0w rsk, hgh lqudIy buI zcr0
gr0wIh. Thc l0ngIcrm s0urccs 0I Inncc whch wcrc dscusscd rc Ihc l0ng
Icrm sccurIcs qu0Icd 0n Ihc sI0ck mrkcI.
Thcsc ncludc Ihc bsc 0ncs whch rc l0n sI0cks (dcbcnIurc), prcIcrcncc
shrcs nd cquIy shrcs. 0Ihcrs rc c0nvcrIblc l0n sI0ck nd wrrnIs.
Ech 0I Ihcsc sccurIcs hs Is 0wn unquc chrcIcrsIcs n Icrms 0I ssuc
0r Il0II0n c0sIs, scrvcng c0sIs, nc0mc pymcnI, cpIl rcpymcnI, Ix
cIIccI nd dluI0n 0I c0nIr0l. Fnncl mngcrs, n rsng cpIl, musI
c0nsdcr Ihc unquc chrcIcrsIcs 0I cch 0I Ihc nsIrumcnIs, b0Ih n bs0luIc
nd rclIvc Icrms, bcI0rc mkng dccs0n 0n whch s0urcc(s) s Ihc bcsI
vsvs Ihc l0ngIcrm sIrIcgc 0b|ccIvc(s) 0I Ihc Irm.
bb
3.5.
. whch 0I Ihc I0ll0wng s N0T s0urcc 0I sh0rI Icrm Inncc!
A Trdc crcdI
0cbcnIurcs
C nkcrs AcccpIncc
0 C0mmcrcl Ppcrs
E nk 0vcrdrIIs
2. Trdc crcdI hs rcl c0sI n 0NE 0I Ihc I0ll0wng sIuI0ns.
() whcrc n0 csh dsc0unI s 0IIcrcd
() whcrc csh dsc0unI s 0IIcrcd buI n0 dvnIgc s Ikcn Ihcrc0I.
() whcrc csh dsc0unI s 0IIcrcd nd dvnIgc s Ikcn 0I Ihc
dsc0unI
A () 0nly
() nd ()
C () 0nly
0 () nd ()
E () 0nly
3. whch 0I Ihc I0ll0wng s n0I rclcvnI IcI0r whcn Ikng dccs0n I0
rsc m0ncy Ihr0ugh l0n sI0cks!
A !ssuc C0sIs
Scrvcng C0sIs
C C0nIr0l
0 CpIl rcpymcnI
E !nIcrcsI pymcnI
4. whch 0I Ihc I0ll0wng s n0I n dvnIgc 0I c0nvcrIblc l0n sI0ck!
A Av0dncc 0I cxccssvc nIcrcsI pymcnIs
Acccss I0 Iunds n pcr0d 0I IghI crcdI
C AlIcrnIvc I0 0rdnry shrcs whcrc Ihcrc s mrkcI mclId0wn
0 Nccd I0 py nIcrcsI mmcdIcly.
E Av0dncc 0I mmcdIc crnngs pcr shrc dluI0n
5. A wrrnI s rghI
() T0 buy ncw shrcs n Ihc IuIurc
() T0 scll ncw shrcs n Ihc IuIurc
() T0 buy nd scll ncw shrcs n Ihc IuIurc
b7
A () 0nly
() 0nly
C () nd ()
0 () nd ()
E () nd ()
3.5.2
Usc Ihc I0ll0wng nI0rmI0n I0 nswcr qucsI0ns nd 2
Thc supplcr 0I y0ur c0mpny hs gvcn (nd y0u hvc cccpIcd) Ihc I0ll0wng
Icrms 2/0 ncI 30
. whI s Ihc cIIccIvc c0sI 0I crcdI pcr nnum!
2. Assumng nIcrcsI rIc n Ihc cc0n0my h0vcrs r0und 40 pcr nnum,
wll y0u dvsc y0ur c0mpny I0 Ikc dvnIgc 0I Ihc dsc0unI! Sh0w
y0ur clculI0n.
3. !n c0nvcrIblc l0n sI0ck grccmcnI, h0w s Ihc c0nvcrs0n rghI
cxprcsscd!
4. !n Ihc ssuncc 0I c0nvcrIblc sccurIy whI s Ihc c0nvcrs0n vluc!
5. !n Ihc ssuncc 0I wrrnIs, whI s cxchngc rI0!
b9
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ 0cInc dIIcrcnI c0nccpIs 0I vluc s uscd n Inncc lIcrIurc,
+ UndcrsInd h0w dcbcnIurc h0ldcrs vluc Ihcr sccurIcs,
+ Expln h0w prcIcrcncc shrch0ldcrs vluc Ihcr shrcs,
+ UndcrsInd h0w 0rdnry shrch0ldcrs vluc Ihcr shrcs,
+ Kn0w Ihc pr0ccss 0I dcIcrmnng Ihc vluc 0I c0nvcrIblc l0n sI0ck, nd
+ UndcrsInd h0w wrrnIs rc vlucd by Ihc mrkcIs.
Fnncl mngcrs 0I c0mpny sh0uld bc nIcrcsIcd n h0w nvcsI0rs vluc
n unIs, Ihc shrcs nd dcbcnIurcs 0I Ihcr c0mpny. Thcrc s sIr0ng
rclI0nshp bcIwccn mny Inncl dccs0ns 0I Ihc c0mpny nd Ihc vluc
0I IhI c0mpny's shrc. Fnncl dccs0ns rc Ikcn gnsI Ihc bckdr0p
0I Ihc nccd I0, I lcsI n prncplc, mxmsc Ihs vluc. Als0, n nvcsI0r's
cxpccII0ns rcgrdng IuIurc csh rcccpIs Ir0m Ihc shrc 0r dcbcnIurc
dcIcrmncs h0w much wll bc pd I0r Ihc shrc 0r dcbcnIurc, I s Ihcsc
smc cxpccII0ns IhI Inncl mngcrs rc IIcmpIng I0 sIsIy.
Thc prncplcs IhI wcrc lcrnI n Imc vluc 0I m0ncy wll bc pplcd n
dcIcrmnng rcspccIvcly Ihc vluc 0I Ihc I0ll0wng m|0r sccurIcs:
dcbcnIurc, prcIcrcncc shrc, 0rdnry shrc, c0nvcrIblc l0n sI0ck nd
wrrnI.
Thcrc rc vr0us c0nccpIs 0I vluc, dcpcndng 0n whI vluc s bcng
dscusscd. Thcy rc: Ihc b00k vluc, Ihc mrkcI vluc, Ihc nIrnsc vluc, Ihc
g0ngc0nccrn vluc nd Ihc brckup vluc.
()
Thc b00k vluc 0I n sscI s Ihc vluc 0I n sscI s sIIcd n Ihc
b00ks 0I cc0unI. !I s Ihc c0sI lcss dcprccI0n I0 dIc. Thc b00k vluc
0I Ihc Irm s Ihc ggrcgIc b00k vluc 0I ll Ihc c0mpny's sscIs lcss
70
Ihc I0Il b00k vluc 0I Is lblIcs nd Ihc I0Il b00k vluc 0I
prcIcrcncc shrcs (I ny).
(b)
Thc mrkcI vluc 0I n sscI s |usI Ihc prcc I whch Ihc sscI wll
bc b0ughI nd s0ld n Ihc 0pcn mrkcI. Thc mrkcI vluc 0I sccurIy
s Ihc mrkcI prcc 0I Ihc sccurIy. Thc mrkcI vluc 0I Irm s usully
Ikcn I0 bc Ihc hghcr 0I Is brckup vluc 0r g0ngc0nccrn vluc.
(c)
Thc nIrnsc vluc 0I sccurIy s whI Ihc vluc sh0uld bc I
ppr0prIcly vlucd bscd 0n Ihc c0mpny's IundmcnIls, IhI s,
Is Iurn0vcr, crnngs, sscIs, IuIurc pr0spccIs, mngcmcnI nd s0
0n. Ths vluc s Is cc0n0mc vluc. !I Ihc sI0ck mrkcI s prcc cIIccnI
(IhI s, ll ncw nI0rmI0n b0uI shrc s mmcdIcly nc0rp0rIcd
nI0 Is prcc) Ihc mrkcI prcc 0I Ihc shrc sh0uld h0vcr r0und Is
nIrnsc vluc.
(d)
Ths vluc s bscd 0n Ihc ssumpI0n IhI Ihc Irm wll c0nInuc I0
0pcrIc nI0 n ndcInIc IuIurc pcr0d nd gcncrIc p0sIvc IuIurc
csh Il0ws I0r Is nvcsI0rs. Ths s Ihc vluc IhI wll bc ssumcd n
Ihs chpIcr.
(c)
Ths s Ihc vluc 0I Ihc Irm whcrc Ihc sscIs (clss 0I sscIs) rc
ndvdully s0ld I Ihcr rclsblc vlucs. Ths 0IIcn hppcns whcn
Ihc Irm s bcng lqudIcd nd sscIs hvc I0 bc rclscd n 0rdcr I0
py 0II Ihc lblIcs 0I Ihc Irm nd dsIrbuIc Ihc blncc (I ny) I0
Ihc 0wncrs.
Thc vluc whch Ihs chpIcr wll bc dscussng s Ihc nIrnsc 0r Iruc vluc
0I sccurIy. Ths s Ihc dsc0unIcd vluc 0I IuIurc csh rcccpIs Ir0m Ihc
sccurIy, usng Ihc nvcsI0r's rcqurcd rIc 0I rcIurn s Ihc dsc0unI rIc.
Thc pcrpcIul dcbcnIurc wll, IrsI bc dscusscd.
Ths s dcbcnIurc whcrc Ixcd m0unI 0I nIcrcsI s pd I0r n
ndcInIc Imc (nInIy).
7
Thc prcscnI vluc 0I dcbcnIurc s 0bIncd smply by cpIlsng
Ihc nIcrcsI pymcnIs I Ihc lcndcr's rcqurcd rIc 0I rcIurn. Ths
rcqurcd rIc 0I rcIurn my bc rcprcscnIcd by 'k' nd I s Ihc rskIrcc
rIc plus prcmum I0r rsk. !I sh0uld bc n0Icd IhI Ihcrc rc dIIcrcnI
nIcrcsI rIcs n Ihc l0ngIcrm c0rp0rIc b0nd (dcbcnIurcs) mrkcI
bccusc 0I dIIcrcnI dcgrccs 0I rsk.
Thc vluc 0I pcrpcIul dcbcnIurc cn bc mIhcmIclly cxprcsscd
s
d
K
!
whcrc s Ihc Ixcd pcr0dc nIcrcsI pd
k
d
s Ihc lcndcr's rcqurcd rIc 0I rcIurn.
Assumc n nvcsI0r nIcnds I0 purchsc N000 dcbcnIurc ssucd I
pr. Thc c0up0n rIc s 5, wIh pr0msc 0I Ixcd nIcrcsI pymcnI
I0r n ndcInIc pcr0d. !I Ihc rcqurcd rIc 0I rcIurn 0I Ihc nvcsI0r s
20 dcIcrmnc Ihc vluc 0I Ihc dcbcnIurc.
\ =
d
K
!
20 . 0
50
=
= N750
Thc nvcsI0r wll buy Ihs dcbcnIurc I0r N750 s Ihs s Is Iruc vluc.
!I Ihc cIul mrkcI prcc s grcIcr Ihn Ihs m0unI, I d0cs n0I py
hm buyng Ihc dcbcnIurc.
!I dcbcnIurc hs spccIcd mIurIy dIc, Is vluc wll bc
dcIcrmncd n0I 0nly by Ihc nIcrcsI pymcnI, Ihc cpIl rcpymcnI
I mIurIy wll ls0 bc c0nsdcrcd. Thc I0rmul I0r vlung such
dcbcnIurc s gvcn s I0ll0ws:
( ) ( ) ( ) ( )
n
d
n
d
2
d d
K
C
K
!
......
K
!
K
!
\
+

+
+
+
+
+
=
whcrc \ s Ihc mrkcI vluc 0I Ihc dcbcnIurc, ! s Ihc nnul nIcrcsI,
C s Ihc cpIl I0 bc rcpd I Inl mIurIy dIc, k
d
s Ihc ycld I0
rcdcmpI0n 0n Ihc dcbcnIurc nd Ihc numbcr 0I ycrs I0 rcdcmpI0n
72
kn0wn s 'pull I0 mIurIy'. !I sh0uld bc n0Icd IhI Ihs ycld I0
rcdcmpI0n s ls0 Ihc rcqurcd rIc 0I rcIurn. !I cn ls0 bc rcIcrrcd
I0 s mrkcI rIc 0I nIcrcsI s 0pp0scd I0 Ihc c0up0n rIc.
An nvcsI0r nIcnds I0 purchsc N000 dcbcnIurc n KN1 Plc. Thc
dcbcnIurc 0rgnlly ssucd I pr n 2009 s duc I0r rcdcmpI0n n
207. !I Ihc c0up0n rIc s b nd lcndcrs, n gcncrl c0nsdcr 20
s rcqurcd rIc 0I rcIurn, gvcn Ihc rsk 0I Ihc dcbcnIurc, dcIcrmnc
Ihc vluc 0I Ihc dcbcnIurc.
( ) ( ) ( ) ( )
8 8 2
20 .
000
20 .
b0
......
20 .
b0
20 .
b0
\ + + =
= Nb0 (P\
A 20 .8
) + N,000 (P\
S 20 .8
)
Usng Ihc prcscnI vluc 0I nnuIy Iblc nd prcscnI vluc 0I sum
Iblc rcspccIvcly, I wll bc 0bscrvcd IhI Ihc P\
A 20 .8
s 3.8372 nd
P\
S 20 .8
s 0.2328. 0vcn Ihs sIuI0n
) 2328 . 0 ( 000 N ) 8372 . 3 ( b0 N \ + =
= Nb3.95 + N232.8
=
0cbcnIurc vlucs IlucIuIc n rcsp0nsc I0 chngcs n mrkcI nIcrcsI
rIcs rclIvc I0 c0up0n rIcs. Thc l0wcr Ihc mrkcI nIcrcsI rIc (ycld
I0 mIurIy) c0mprcd wIh Ihc c0up0n rIc, Ihc hghcr Ihc vluc 0I
Ihc dcbcnIurc. !n Ihc b0vc cxmplc, ssumng lcndcrs rc, n gcncrl,
n0w dcmndng 4 s Ihcr ppr0prIc rIc 0I rcIurns. Thc vluc
wll bc:
\ = N b0 (4.b385) + N000 (0.3,50b)
= N742.b + N350.b0
= N,092.9b.
Thc rcqurcd rIc 0I rcIurn 0n sccurIy s rcIlccI0n 0I Ihc rsk 0I
Ihc sccurIy s pcrccvcd by nvcsI0rs. !n Ihc b0vc cxmplc, whcn
Ihc rcqurcd rIc 0I rcIurn Ills I0 4, I mcns Ihc mrkcI's pcrccpI0n
73
0I Ihc rsk 0I Ihc sccurIy hs dr0ppcd. !nvcsI0rs rc IhcrcI0rc prcprcd
I0 py prcmum n purchsng Ihc dcbcnIurc by pyng N,092.82
n0w I0 rcccvc N,000 I mIurIy. !n Ihc crlcr csc, Ihc dcbcnIurcc
hd I0 bc s0ld I dsc0unI I0 Is Icc 0r pr vluc bcI0rc nvcsI0rs
c0uld purchsc such dcbcnIurc. !I s by buyng I Ihc prcc 0I N84b.75
IhI Ihcy w0uld bc blc I0 cn|0y Ihc smc Inncl bcncIIs IhI rc
vlblc Ir0m Ihc ncxI bcsI lIcrnIvc nvcsImcnI n Ihc smc rsk
clss, ycldng 20 rcIurn.
F0r gvcn chngc n rcqurcd rcIurn, Ihc vluc 0I dcbcnIurc wll
IlucIuIc by grcIcr m0unI, whcn Ihcrc s l0ng pull I0 mIurIy
(Ihc rcmnng lIc 0I Ihc sccurIy). Als0, Ihc vluc 0I dcbcnIurc wll
bc ncrcr Is rcdcmpI0n vluc, Ihc ncrcr I s I0 Is rcdcmpI0n dIc.
whcn Ihcrc s sh0rI pull I0 mIurIy, nIcrcsI pymcnI nd chngcs
n rcqurcd rcIurn ply lcss sgnIcnI r0lc n dcIcrmnng Ihc vluc
0I dcbcnIurc n Ihc b0nd mrkcI. H0wcvcr, whcn Ihcrc s l0ng pull
I0 mIurIy, Ihc dcbcnIurc hs grcI rsk 0I prcc chngc whcn
chngcs 0ccur n Ihc gcncrl lcvcl 0I nIcrcsI rIcs.
Thcsc rc dcbcnIurcs IhI py n0 nIcrcsI. !nsIcd, Ihc dcbcnIurcs rc
s0ld I hgh dsc0unI I0 Ihc pr vluc wIh Ihc rcIurn s0lcly n sIcdy
cpIl pprccI0n 0vcr Is 0rgnl l0w prcc vluc I0wrd Ihc
rcdcmpI0n dIc whcn Ihc dcbcnIurc wll bc rcdccmcd I Is n0mnl
vluc.
Thc I0rmul I0r zcr0c0up0n dcbcnIurc s:
( )
n
d
K
C
\
+
=
Assumc KylI Plc ssucs zcr0c0up0n dcbcnIurc hvng 2 ycr
pull I0 mIurIy nd pr vluc 0I N000. !I n nvcsI0r's rcqurcd rIc
0I rcIurn s 5, Ind Ihc vluc 0I Ihc dcbcnIurc.
Usng Ihc b0vc I0rmul
( )
n
d
K
C
\
+
=
Thc vluc wll bc:
( )
2
5 .
000 ,
74
Usng Ihc prcscnI vluc 0I sum Iblc, Ihc dsc0unI IcI0r (I 5 I0r
2 ycrs) s 0.8b9. Thcn,
\ = N,000 x 0.8b9
N8b.90
!I Ihc dcbcnIurc s purchscd I0r N8b.90 nd s hcld I0 mIurIy I0r
rcdcmpI0n I0r N000, Ihc 0rgnl nvcsImcnI w0uld hvc gvcn
5 ycld 0n nvcsImcnI
whcrc c0mp0undng Ikcs plcc Iwcc ycr (s gnsI 0ncc ycr),
Ihcrc s nccd I0 m0dIy Ihc 'vluc I0rmul' s I0ll0ws:
n 2
d
n 2
d
2
d
d
2
K

\
2
K

2
!
......
2
K

2
!
2
K

2
!
\
|
.
|

\
|
+
+
|
.
|

\
|
+
+
|
.
|

\
|
+
+
|
.
|

\
|
+
=
whcrc K
d
s Ihc rcqurcd rIc 0I rcIurn,
2
!
s Ihc m0unI 0I nIcrcsI
pd scmnnully nd s Ihc numbcr 0I scmnnul pcr0ds Ill
mIurIy.
rlcI Plc 8 0cbcnIurc SI0ck hs 7 ycrs I0 mIurIy. !nIcrcsI s
pd scmnnully. !I Ihc n0mnl rcqurcd rIc 0I rcIurn s 20 p..,
ClculIc Ihc vluc 0I N000 Icc vluc dcbcnIurc.
Thc vluc 0I Ihs dcbcnIurc s clculIcd s I0ll0ws:
P\
A
P\
S
( ) ( )
4 , 0 S 4 , 0 A
P\ 000 P\ 90 \ + =
= N90 (7.3bb7) + N,000 (0.2b33)
= Nbb3 + N,000(0.2b33)
= Nbb3 + N2b3.30
N
75
!I sh0uld bc n0Icd IhI Ihc b0vc clculI0ns nv0lvc I0ur vrblcs Ihc
c0up0n rIc, Ihc ycld, mIurIy nd mrkcI prcc (vluc). 0ncc ny Ihrcc 0I
Ihc I0ur vrblcs rc kn0wn, Ihc I0urIh cn bc clculIcd.
As mcnI0ncd crlcr n Ihs pck, prcIcrcncc shrcs hvc n0 sIIcd mIurIy
dIcs nd h0ldcrs rc cnIIlcd I0 Ixcd nc0mc. Ths Ixcd nc0mc, whch s n
I0rm 0I dvdcnd, g0cs nI0 n ndcInIc IuIurc pcr0d.
!n vcw 0I Ihc b0vc, Ihc smc vluI0n ppr0ch, s uscd n pcrpcIul
dcbcnIurcs, wll bc uscd.
Thc vluc 0I prcIcrcncc shrc s, rcprcscnIcd by \ =
p
p
K
0
whcrc \ s Ihc prcscnI vluc, 0
p
s Ihc sIIcd dvdcnd pcr nnum pcr shrc
nd K
p
s Ihc rcqurcd rIc 0I rcIurn.
Srky Plc hs n ssuc 5 N5m prcIcrcncc shrcs 0I N cch. !I Ihc rcqurcd
rIc 0I rcIurn s 20, dcIcrmnc Ihc vluc 0I cch prcIcrcncc shrc.
Usng Ihc b0vc I0rmul:
p
p
K
0
\ =
20 . 0
5 . 0
\ =
=N0.75 pcr shrc.
Thcrc s n0 0nc gcncrlly cccpIblc mcIh0d 0I vlung n 0rdnry shrc.
H0wcvcr, Ihcrc s 0nc mcIh0d IhI s s0 c0mm0nly uscd. Ths mcIh0d l00ks I
Ihc vluc 0I n 0rdnry shrc s Ihc dsc0unIcd vluc 0I ll cxpccIcd csh
dvdcnds I0 bc pd by Ihc c0mpny I0r n ndcInIc IuIurc pcr0d. Thc
I0rmul I0r Ihs cxprcss0n cn bc wrIIcn s I0ll0ws:

= I
I
c
I
) K + (
0
= \
7b
whcrc s Ihc csh dvdcnd I0 bc rcccvcd I Ihc cnd 0I Imc pcr0d , nd
s Ihc rcqurcd rcIurn I0r Ihc nvcsI0r.
Thc b0vc I0rmul s ppr0prIc I0r IrusIcc 0I pcrpcIul IrusI Iund wh0
nIcnds I0 h0ld Ihc shrcs ndcInIcly. !I n nvcsI0r nIcnds I0 scll hs shrcs,
sy IIcr Ihrcc ycrs, Ihc I0rmul cn bc d|usIcd s I0ll0ws:
( ) ( )
I
c
3
3
I
c
I
K
P
K
0
\
+
+
+
=

=
whcrc P
3
s Ihc cxpccIcd scllng prcc 0I Ihc shrc I Ihc cnd 0I Ihc Ihrd ycr
ssumng IhI buycrs rc prcprcd I0 cqurc Ihc shrcs I Ihc cnd 0I Ihc
Ihrcc ycrs. Thcsc buycrs w0uld n Iurn bsc Ihcr dccs0n I0 buy I
prIculr prcc 0n cxpccII0n 0I IuIurc dvdcnds nd IuIurc scllng prcc
I Ihc Imc 0I dsp0sl. Ths pr0ccss nd Ihnkng g0 0n nd 0n succcssvcly
I0r n ndcInIc pcr0d 0I Imc. !I s clcr Ir0m Ihc b0vc pr0ccss IhI whI
Ihc shrch0ldcr rcccvcs Ir0m Ihc c0mpny s csh dvdcnds. Thcrc s,
IhcrcI0rc, |usIIcI0n I0r Ihc usc 0I dvdcnds s Ihc bss I0r Ihc vluI0n
0I 0rdnry shrcs.
Thc usc 0I dvdcnd vluI0n m0dcls I0r c0mpuIng Ihc nIrnsc
vluc 0I shrc nv0lvcs mkng s0mc spccIc ssumpI0ns b0uI
dvdcnd gr0wIh pIIcrns nd rcqurcd rIcs 0I rcIurn. Thc IrsI 0I
Ihcsc m0dcls s Ihc 0nc 0I c0nsInI gr0wIh n rIc 0I dvdcnds.
!n Ihs vluI0n m0dcl, dvdcnds pcr shrc rc ssumcd I0
gr0w ndcInIcly I c0mp0und gr0wIh rIc, 'g'. Ths IrnslIcs
nI0 Ihc I0ll0wng I0rmul:
g K
0
\
c

=
whcrc 0

s Ihc dvdcnd cxpccIcd I0 bc rcccvcd I Ihc cnd 0I

ycr , (K
c
) s Ihc rcqurcd rIc 0I rcIurn I0r Ihc shrc nd (g)
s Ihc ssumcd c0nsInI gr0wIh rIc.
77
1M1 Plc plns I0 py dvdcnd 0I N2 pcr shrc I Ihc cnd 0I ycr .
Ths dvdcnd s cxpccIcd I0 gr0w ndcInIcly I Ihc rIc 0I 0 pcrccnI.
Thc rcqurcd rIc 0I rcIurn 0n Ihs shrc s 5 pcrccnI. whI s Ihc
vluc 0I 1M1 Plc's shrc!
Applyng Ihc b0vc I0rmul:
0 . 0 5 . 0
2
\

=
N
!I sh0uld bc n0Icd IhI whcrc Ihc dvdcnd s Ihc dvdcnd IhI hs
|usI bccn pd (s gnsI cxpccIcd I0 bc pd), Ihs s dvdcnd I Ihc
bcgnnng 0I Ihc ycr 0
0
. Ths sh0uld bc c0nvcrIcd I0 by mulIplyng
by (+g), IhI s 0
0
(+g).
AI Imcs Ihc vluc 0I n 0rdnry shrc cn bc c0mpuIcd usng Ihc
mulIplc ppr0ch. Ths ppr0ch cnblcs pr0spccIvc nvcsI0r
I0 kn0w h0w much hc wll py I0r cvcry Nr 0I IuIurc cxpccIcd
crnngs. !n usng Ihs ppr0ch, Ihc dvdcnd c0nsInI gr0wIh m0dcl
wll bc cxprcsscd n Icrms 0I crnngs, s sh0wn n Ihc I0ll0wng
llusIrI0ns.
1M1 Plc rcIns c0nsInI pcrccnIgc 0I Is crnng cch ycr. Ths
cn bc rcprcscnIcd by X. Thc dvdcnd pymcnI rI0 wll ls0 bc
c0nsInI I sy (x)
Thus
x
E
0

=
( ) x E 0

=
SubsIIuIng I0r n Ihc dvdcnd c0nsInI gr0wIh m0dcl
78
g K
) x ( E
\
c

=
ThI s: ) x ( E ) g K ( \
c
=
( )
g K
x
E
\
c

=
Assumng 1M1 Plc nIcnds I0 rcIn cvcry ycr 30 0I Is IuIurc
cxpccIcd crnngs Ihcn
0 . 0 5 . 0
30 . 0
E
\

=
05 . 0
70 . 0
=
=
Ths s Ihc mulIplc (0r rI0).
scd 0n N2 pcr shrc dvdcnd nd 0.70 py0uI rI0, Ihc crnngs
pcr shrc (EPS) wll bc N2/0.70 nd Ihs wll bc ppr0xmIcly N2.80.
Thc vluc 0I Ihc shrc cn Ihcn bc 0bIncd by mulIplyng Ihc EPS
by Ihc P/E rI0, IhI s (N2.80 X 4) whch wll bc cqul I0
ppr0xmIcly N40.
AlIh0ugh, Ihs s n lIcrnIvc vluI0n m0dcl, I s sIll bscd 0n
Ihc dvdcnd c0nsInI gr0wIh m0dcl.
Ths ssumcs IhI Ihc prcscnI lcvcl 0I dvdcnd wll bc mnIncd
ndcInIcly. Thc c0nsInI gr0wIh m0dcl cn bc m0dIcd I0r n0 gr0wIh
sIuI0n s I0ll0ws:
0 K
0
\
c

=
c

K
0
=
79
AC Plc plns I0 py c0nsInI dvdcnd 0I N2 pcr shrc ndcInIcly. Thc
rcqurcd rIc 0I rcIurn 0n Ihc shrc s 20 pcrccnI. ClculIc Ihc vluc 0I Ihc
shrc.
Usng Ihc b0vc I0rmul:
c

K
0
\ =
20 . 0
2
\ = =
N0.00
Thc gr0wIh pIIcrns 0I dvdcnds I0r s0mc c0mpncs, prIculrly Ihc y0ung
gr0wng 0ncs, my n0I I0ll0w Ihc n0rml pIIcrns sh0wn by mIurc
c0mpncs. !nIlly Ihcr dvdcnd pymcnIs, bccusc 0I Ihcr b0vcvcrgc
crnngs pcrI0rmncc, my bc I0ll0wng b0vcvcrgc pIIcrns.
AIIcr s0mcImc, c0mpcII0n nd 0Ihcr IcI0rs my I0rcc Ihcm I0 rcvcrI I0 Ihc
n0rml gr0wIh pIIcrns wIhn Ihc ndusIry. Thc vluI0n 0I Ihc shrcs 0I
such c0mpncs wll bc d0nc n Ihrcc sIgcs:
ClculI0n 0I Ihc prcscnI vluc 0I cch 0I Ihc dvdcnds pd durng
Ihc b0vcvcrgc gr0wIh pIIcrn, Ikng nI0 cc0unI Ihc c0mp0und gr0wIh
rIc, nd ddI0n 0I Ihc P\s.
ClculI0n 0I Ihc prcscnI vluc 0I dvdcnd (wIh c0nsInI gr0wIh
'g') pd I0r n ndcInIc IuIurc pcr0d.
AddI0n 0I Ihc P\s 0bIncd n sIgcs nd 2.
YS0 Plc s cxpccIcd I0 chcvc n b0vcvcrgc pcrI0rmncc n Ihc ncxI sx
ycrs 0I Is 0pcrI0ns, wIh dvdcnds gr0wng I sy 2 pcr nnum. AIIcr
Ihs pcr0d, I s cnvsgcd IhI c0mpcII0n Ir0m b0Ih cxsIng c0mpncs
nd ncw cnIrnIs wll scI n. Thc gr0wIh n dvdcnds mghI c0nscqucnIly
rcvcrI I0 ndusIry vcrgc 0I sy 8
Thc currcnI dvdcnd s N pcr shrc. whI sh0uld bc Ihc vluc 0I Ihc shrc
n0w, I Ihc rcqurcd rcIurn 0n cpIl s 0!
80
N(:2) : N.2 0.909 .02
2 N(.2)2 : N.25 0.82b .03
3 N(.2)3 : N.4 0.75 .0b
4 N(.2)4 : N.57 0.b83 .07
5 N(.2)5 : N.7b 0.b2 .09
b N(.2)b : N.97 0.5b4 .
b.38
\luc 0I shrc I Ihc cnd 0I ycr b (IhI s bcgnnng 0I ycr 7)
g K
0
c
7

=
0.08 0.0
.2 X .97

=
0.02
2.2
=
\luc n0w 0I ycr b prcc: N0.50 (0.5b4)
=Nb2.32
\luc 0I shrc n0w = Nb.38 + Nb2.32
= Nb8.70
Thc b0vc IcrIvc pr0ccss cn ls0 bc cxprcsscd n Icrms 0I Ihc I0ll0wng
I0rmul:
( )
( )
( )
b
c
b
I
c
7
I
c
I
0
K
g K
0
K
* g 0
\

=
+
|
|
.
|

\
|

+
+
+
=

whcrc g* s Ihc b0vcvcrgc gr0wIh rIc whlc g s Ihc n0rml gr0wIh
rIc.
N
N
8
!I sh0uld bc n0Icd IhI Ihc gr0wIh 0I dvdcnds n Ihc scc0nd sIgc uscs Ihc
cxpccIcd dvdcnds n ycr b s Is bsc.
A c0nvcrIblc l0n sI0ck (0r dcbcnIurc) s 'hybrd' sccurIy I s l0n sI0ck
buI wIh Ihc rghI I0 c0nvcrI I0 0rdnry shrcs n IuIurc.
Thc vluc 0I Iypcl c0nvcrIblc wll IhcrcI0rc bc dscusscd Ir0m Iw0 p0nIs
0I vcw:
() !Is vluc s sIrghI l0n sI0ck, nd
(b) !Is vluc s Is c0nvcrs0n vluc.
whIcvcr vluc c0nvcrIblc Ikcs 0n, wll bc lrgcly nIlucnccd by m0vcmcnI
n Ihc prcc 0I Ihc shrc 0I Ihc ssung c0mpny. !I Ihc prcc 0I Ihc shrc n Ihc
mrkcI m0vcs up, Ihc vluc 0I Ihc c0nvcrIblc wll bc dcIcrmncd mnly by
Is c0nvcrs0n vluc. !I Ihc prcc Ills, Ihc vluc 0I Ihc c0nvcrIblc wll bc
dcIcrmncd by Ihc vluc 0I sIrghI dcbcnIurc ssucd by Ihc smc c0mpny.
!n Ihs csc, Ihc vluc 0I Ihc c0nvcrIblc wll n0I Ill bcl0w Ihc vluc 0I Ihc
'sIrghI', Ihc c0nvcrIblc s sd I0 hvc d0wnsdc pr0IccI0n gnsI rsk.
A sIrghI l0n sI0ck s c0nvcrIblc wIh0uI Is c0nvcrs0n IcIurcs,
ssucd by Ihc smc c0mpny. Thc vluc 0I Ihc c0nvcrIblc wll bc Ihc
prcc I whch Ihc sI0ck wll scll n Ihc 0pcn mrkcI.
Assumng c0mp0undng Ikcs plcc scmnnully, Ihs vluc cn bc
dcIcrmncd v Ihc I0ll0wng I0rmul:
( ) ( )
n 2
n 2
I
I d
2
r

R\
2
r

2
!
\S
+
+
+
=

=
whcrc \S
d
s Ihc sIrghI dcbcnIurc vluc 0I Ihc c0nvcrIblc.
2
!
s Ihc nIcrcsI pymcnI s dcIcrmncd by Ihc c0up0n rIc nd
c0mp0undcd scmnnully.
s Ihc rcdcmpI0n vluc 0I Ihc dcbcnIurc.
s Ihc numbcr 0I c0mp0undng pcr0ds I0 rcdcmpI0n.
82
2
r
s ycld I0 mIurIy 0I sIrghI l0n sI0ck 0I Ihc smc c0mpny
ssumng scmnnul c0mp0undng.
Fdcls Plc hs n ssuc 2 N000 C0nvcrIblc dcbcnIurc duc I0
mIurc n 0 ycrs Imc. Thc nIcrcsI s pd scmnnully. A sIrghI
dcbcnIurc smlr n ll rcspccIs I0 Ihc c0nvcrIblc cxccpI IhI I hs
n0 c0nvcrs0n IcIurcs, cn bc s0ld n Ihc mrkcI I0 ycld b pcr
nnum. ClculIc Ihc sIrghI dcbcnIurc vluc 0I Ihc c0nvcrIblc.
( ) ( )
20 8, S
20 , 8
A
P\ 000 P\ b0 \S0 + =
( ) ( ) 0.25 000 9.88 b0 \S0 + =
= N589.08 + N25.00
= N804.08
= N
As crlcr sd, Ihc c0nvcrs0n vluc 0I c0nvcrIblc s smply Ihc
pr0ducI 0I Ihc currcnI mrkcI prcc 0I Is c0mpny's shrc nd Ihc
c0nvcrs0n rI0. Ths vluc s IuncI0n 0I Ihc IIrcIvcncss 0I Ihc
c0nvcrs0n IcIurc whch, n Iurn, dcpcnds 0n Ihc upwrd m0vcmcnI
0I Ihc shrc prcc. H0wcvcr c0nvcrIblc bccusc 0I Is d0wnsdc
pr0IccI0n wll n0rmlly scll 0vcr nd b0vc Is c0nvcrs0n vluc.
\0lIlIy 0I shrc prcc ncrcmcnIs dd s0mc vluc I0 Ihs d0wnsdc
pr0IccI0n. Thc m0rc v0lIlc Ihc shrc prcc m0vcmcnI s, Ihc grcIcr
Ihc vluc ddcd, nd Ihc grcIcr Ihc lkclh00d 0I Ihc c0nvcrIblc
scllng I prcc 0vcr Is c0nvcrs0n vluc.
whcn c0nvcrIblc dcbcnIurc sclls I prcc 0vcr Ihc sIrghI b0nd
vluc, Ihc dIIcrcncc s kn0wn s prcmum 0vcr sIrghI b0nd vluc.
whcn Ihc c0nvcrIblc sclls I prcc b0vc Is c0nvcrs0n vluc, Ihc
dIIcrcncc s cllcd prcmum 0vcr c0nvcrs0n vluc.
!n Ihc llusIrI0n b0vc, Ihc sIrghI dcbcnIurc Il00r vluc 0I Fdcls
Plc c0nvcrIblc dcbcnIurc s N804. Ths mcns IhI I Ihc prcc 0I Ihc
shrc hs dr0ppcd s0 much IhI Ihc c0nvcrs0n IIrcIvcncss s nl 0r
N
N
83
ncglgblc, Ihc mrkcI prcc 0I Ihc c0nvcrIblc cnn0I Ill bcl0w Ihs
Il00r prcc 0I N804. Thc sIrghI dcbcnIurc vluc 0I c0nvcrIblc d0cs
IlucIuIc 0vcr Imc dcpcndng 0n IlucIuI0ns n nIcrcsI rIc nd
chngcs n Ihc rsk pr0Ilc 0I Ihc c0mpny. 0Ih vrblcs wll IIccI
Ihc cxpccIcd ycld I0 mIurIy 0I Ihc sIrghI dcbcnIurc nd hcncc Is
vluc.
!n Ihc mrkcI, c0nvcrIblc wll n0rmlly scll I vluc 0vcr nd
b0vc sIrghI dcbcnIurc, IhI s, I prcmum. As l0ng s Ihc mrkcI
prcc 0I Ihc c0mpny's shrc s rsng rclIvc I0 Ihc c0nvcrs0n prcc,
Ihc c0nvcrs0n rghI hs s0mc vluc nd I pys I0 c0nvcrI. T0 Ihc cxIcnI
IhI Ihc c0nvcrs0n rghI hs s0mc vluc, Ihc c0nvcrIblc wll bc scllng
I vluc 0vcr nd b0vc Ihc sIrghI dcbcnIurc vluc. Thc hghcr
Ihc mrkcI prcc, Ihc grcIcr Ihc dIIcrcncc bcIwccn Ihcsc Iw0 vlucs
(Ihc prcmum).
Thc m|0r rcs0n I0r Ihc cxsIcncc 0I prcmums n b0Ih cscs s Ihc
unc0mm0n IIrcIvcncss 0I c0nvcrIblc duc I0 Is dul chrcIcrsIcs
0I dcbcnIurc nd bulIn 0pI0n. Thc sccurIy smulInc0usly gvcs
Ihc h0ldcr pr0IccI0n gnsI d0wnsdc rsk nd n 0pp0rIunIy I0
shrc n Ihc IuIurc I0rIuncs 0I Ihc c0mpny I nd whcn Is shrc prcc
g0cs up.
Thc Ihc0rcIcl vluc 0I wrrnI cn bc clculIcd by Ihc I0ll0wng I0rmul:
N whcrc s Ihc currcnI mrkcI prcc 0I Ihc 0rdnry shrc 0I Ihc
c0mpny, E s Ihc cxcrcsc prcc nd s Ihc numbcr 0I shrcs Ihc h0ldcr 0I
Ihc wrrnI cn buy wIh 0nc wrrnI.
Assumc, I0r cxmplc, IhI h0ldcr 0I 0nc wrrnI s cnIIlcd I0 purchsc 0nc
shrc I N. Hc s ls0 ll0wcd I0 cxcrcsc Ihs wrrnI nyImc wIhn Ihc
ncxI I0ur ycrs. Thc prcscnI mrkcI prcc 0I Ihc shrc s N4. Thc Ihc0rcIcl
vluc 0I Ihc wrrnI sh0uld bc (N4 N) = N3. Thc cIul prcc 0I Ihc
wrrnI n Ihc mrkcI sh0uld n0I dr0p bcl0w N3. !I I Ills bcl0w Ihs Igurc,
spcculI0rs wll m0vc n, buy up Ihc wrrnIs, cxcrcsc Ihcm nd scll Ihc
shrcs. Thc rbIrgc cIvIy wll push bck Ihc prcc 0I Ihc wrrnI I0 N3.
whcrc Ihc cIul mrkcI prcc 0I Ihc shrc s lcss Ihn Ihc cxcrcsc prcc, Ihc
Ihc0rcIcl vluc 0I wrrnI s nl. Thc cIul mrkcI prcc 0I Ihc wrrnI
sh0uld n0rmlly bc hghcr Ihn Is Ihc0rcIcl vluc. Thc rcs0n s Ihc gcrng
bcncIIs whch ccruc I0 buycrs 0I wrrnIs.
Supp0sc Ihc cxcrcsc prcc 0I wrrnI s N4 whcn Ihc prcc 0I Ihc undcrlyng
shrc s Nb, Ihs gvcs Ihc wrrnI's Ihc0rcIcl vluc 0I N2. Supp0sc IurIhcr
84
IhI Ihcrc s 50 upwrd chngc n shrc prcc I0 N9, Ihcn Ihc Ihc0rcIcl
vluc wll bc N5 0r 50.
!I wll bc sccn Ir0m Ihc b0vc IhI grcIcr bcncII wll ccruc Ir0m h0ldng
Ihc wrrnI rIhcr Ihn h0ldng Ihc shrc. 0crng, 0I c0ursc, ls0 0pcrIcs
I0 Ihc dsdvnIgc 0I Ihc wrrnI h0ldcr, s gnsI Ihc shrch0ldcr. whcrc
Ihcrc s dr0p n Ihc prcc 0I Ihc shrc, Ihcrc wll bc m0rc Ihn pr0p0rI0nIc
l0ss I0 Ihc wrrnI h0ldcr. F0r cxmplc 0 d0wnwrd chngc n prcc
w0uld crcIc 30 dr0p n Ihc Ihc0rcIcl vluc 0I Ihc wrrnI |
.
|

\
|

2
40 .
2
.
H0wcvcr, Ihc wrrnI cnn0I Ill I0 prcc bcl0w zcr0. F0r Ihc wrrnI prcc
I0 Ill I0 zcr0, Ihc Ihnkng n Ihc mrkcI musI bc IhI Ihc shrc prcc cnn0I
rsc 0vcr Ihc cxcrcsc prcc durng Ihc cxcrcsc pcr0d, Ihs s n0I s0.
MrkcI prccs rc, n gcncrl, usully 0vcr Ihcr Ihc0rcIcl vlucs. Ths s
bccusc whcn prccs 0I Ihc undcrlyng shrcs rc g0ng up, wrrnIs d0
hvc p0IcnIls I0r upwrd m0vcmcnIs n Ihcr vlucs, h0wcvcr whcn prccs
0I Ihc shrcs rc Illng Ihcrc s d0wnwrd pr0IccI0n, n IhI Ihc vluc 0I
wrrnI cnn0I Ill bcl0w zcr0.
!n Icrms 0I Ihc dsc0unIcd csh Il0ws, Ihc currcnI vluc 0I wrrnI
sh0uld bc Ihc dIIcrcncc bcIwccn Ihc IuIurc prcc 0I Ihc shrc nd Ihc
cxcrcsc prcc 0I Ihc wrrnI. Ths rclI0nshp cn bc sIIcd n Icrms
0I Ihc I0ll0wng I0rmul.
( )
( )
n
w
n
0
w
K
E g P
\
+
+
=
whcrc s Ihc currcnI vluc 0I Ihc wrrnI
s Ihc currcnI mrkcI prcc 0I Ihc shrc
g s Ihc cxpccIcd gr0wIh rIc n shrc prcc.
s Ihc c0sI 0I cpIl rclcvnI I0 Ihc wrrnI.
s Ihc numbcr 0I Imc pcr0ds cxprng bcI0rc Ihc wrrnI s
cxcrcscd.
Thc pr0ccsscs 0I dcIcrmnng Ihc nIrnsc vlucs 0I vr0us Inncl sscIs
hvc bccn hghlghIcd. Thc vluc n cch csc, s whI I sh0uld bc, gvcn
Ihc IundmcnIls 0I Ihc ssung c0mpny. Thc nIrnsc 0r Iruc vluc 0I ny
Inncl sscI s 0I prIculr nIcrcsI I0 Ihc nvcsI0r. Ths vluc s n0rmlly
c0mprcd wIh cIul mrkcI prcc bcI0rc dccs0n I0 buy 0r scll s Ikcn.
Thc 0sc0unIcd Csh Fl0w (0CF) mcIh0d hs bccn uscd n Ihc vluI0n
pr0ccss 0I Ihc sccurIcs dscusscd. Thc Iull csh rcccpIs Ir0m cch sscI
sh0uld bc dsc0unIcd I0 Ihcr prcscnI w0rIh, usng Ihc c0sI 0I cpIl
ppr0prIc I0 IhI sccurIy.
N
N
85
4.9.
. Thc dsc0unIcd vluc 0I IuIurc csh rcccpIs Ir0m sccurIy s IhI sccurIy's
A MrkcI vluc pcr unI
NcI sscI vluc pcr shrc
C !nIrnsc vluc
0 00ngc0nccrn vluc
E rckup vluc
2. A dcbcnIurc whcrc Ixcd nnul m0unI 0I nIcrcsIs s pd I0r cvcr s
cllcd:
A Rcdccmblc dcbcnIurc
!rrcdccmblc dcbcnIurc
C L0ngIcrm dcbcnIurc
0 McdumIcrm dcbcnIurc
E C0nvcrIblc dcbcnIurc
3. Thc mrkcI rIc 0I Ixcd nIcrcsI sccurIy s Is
() C0up0n rIc
() N0mnl rIc
() Ycld
A () 0nly
() 0nly
C () 0nly
0 () nd ()
E () nd ()
Usc Ihc I0ll0wng nI0rmI0n I0 nswcr qucsI0ns 4 nd 5
1! Plc ssucd 2 pcr ccnI N,000 dcbcnIurc sI0ck Ivc ycrs g0. !I s duc I0r
rcdcmpI0n n Ihc ncxI Ivc ycrs. CurrcnIly, nvcsI0rs n gcncrl rc skng I0r
5 pcr nnum s Ihc ppr0prIc rIc 0I rcIurn
4. C0nsdcrng Ihc currcnI chrcIcrsIcs 0I Ihs dcbcnIurc, wll Is vluc
ncrcsc 0r dccrcsc!
() ncrcsc
() dccrcsc
() rcmn unchrgcd
8b
A () 0nly
() 0nly
C () nd ()
0 () nd ()
E () 0nly
5, ClculIc Ihc cxpccIcd vluc 0I Ihc sccurIy.
A N,250
N,000
C N,20
0 N,50
E N800
4.9.2
. A b0nd whch d0cs n0I mkc ny pcr0dc nIcrcsI pymcnIs buI nsIcd
s Irdcd I prcc much bcl0w Is pcr vluc s cllcd _______________
2. whI s pcrpcIul dcbcnIurc!
3. whI s Ihc dIIcrcncc bcIwccn nIcrcsI ycld nd ycld I0 mIurIy!
4. () whI s Ihc smlrIy bcIwccn prcIcrcncc shrcs nd dcbcnIurcs!
() !n Icrms 0I vluI0n, whI s Ihc rclI0nshp bcIwccn prcIcrcncc
shrcs nd rrcdccmblc dcbcnIurcs!
5. whcrc gr0wIh rIc, (n usng Ihc 00rd0n's gr0wIh I0rmulc) s n0I
gvcn, h0w wll Ihs rIc bc csImIcd!
87
AIIcr rcdng Ihs chpIcr, rcdcrs sh0uld bc blc I0.
+ 0scuss Ihc mn mcdumIcrm s0urccs 0I Inncc vlblc I0 c0mpny,
+ HghlghI Ihc Iw0 mn cIcg0rcs 0I lcsc nd sIIc Ihc m|0r dIIcrcnccs bcIwccn
Ihcm,
+ 0cscrbc Ihc mn Iypcs 0I Inncc lcsc,
+ SIIc Ihc sIcps nv0lvcd n cvluIng lcsc 0r buy dccs0n,
+ Apprsc lcsc 0r buy nvcsImcnI pr0p0sl nd Ikc n ppr0prIc dccs0n,
nd
+ SIIc Ihc dvnIgcs nd dsdvnIgcs 0I lcsc rrngcmcnI I0 Ihc lcsscc.
McdumIcrm s0urccs 0I Inncc pr0vdc Iunds 0n Irly m0rc pcrmncnI
bss Ihn sh0rIIcrm s0urccs. Thc pcr0ds 0I l0n usully lc bcIwccn 0nc
ycr nd scvcn ycrs, lIh0ugh, whI c0nsIIuIcs mcdum Icrm s n0I cxcIly
spccIcd. Fnncl mngcrs n0rmlly uIlsc Iunds 0bIncd Ir0m Ihcsc
s0urccs I0 Inncc Ixcd sscIs nd nvcsImcnIs n sI0cks nd dcbI0rs.
RcpymcnIs 0I l0ns Ir0m Ihcsc s0urccs rc usully Ir0m csh Il0ws gcncrIcd
n IuIurc ycrs nd rc mdc n rcgulr pcr0dc nsIlmcnIs. Thc m|0r
s0urccs IhI wll bc dscusscd n Ihs chpIcr ncludc mcdum Icrm bnk
l0ns, cqupmcnI Inncng, pr0|ccI Inncng nd Inncl lcsc Inncng.
Thcsc rc l0ns gvcn 0uI by c0mmcrcl bnks I0r pcr0ds rngng Ir0m 0nc
ycr I0 Ivc 0r scvcn nd cvcn Icn ycrs. Thcy rc usully gvcn I0 c0mpncs
I0 Inncc Ihcr mcdumIcrm w0rkng cpIl rcqurcmcnIs 0r I0 Inncc 0n
l0ngcr Imc bss Ihcr Ixcd sscIs nccds. Thcrc s usully lcgl c0nIrcIul
l0n grccmcnI whch spccIcs Ihc Icrms 0I Ihc l0n nd rghI 0I Ihc prIcs
I0 Ihc l0n IrnscI0n. !nIcrcsI s usully chrgcd 0n Ihc m0unI b0rr0wcd
I0 c0vcr Ihc pcr0d 0I Ihc l0n. Thc m0unI chrgcd vrcs bcIwccn bnks
nd I s usully spccIcd pcrccnIgc sy, bcIwccn 2 nd 5 0vcr bnk's
prmc lcndng rIc dcpcndng 0n Ihc bnk's 0pp0rIunIy c0sI 0I Iunds nd Ihc
rsk pcrccpI0n 0I Ihc c0mpny by Ihc bnk. !n ddI0n Ihcrc s Ixcd
pcrccnIgc up I0 2 pcrccnI 0I Ihc m0unI b0rr0wcd s IlI chrgc cllcd
88
mngcmcnI Iccs 0r dmnsIrIvc chrgcs, by Ihc bnks. RcpymcnIs
rc n0rmlly gcrcd I0wrd Ihc csh Il0w gcncrIng pIIcrns 0I Ihc c0mpny
buI gcncrlly Ihcy rc mdc cIhcr n pcr0dc cqul nnul nsIlmcnIs 0r
n lump sum I Ihc cnd 0I Ihc pcr0d 0I Ihc l0n. Thc I0rmcr s m0rc c0mm0n.
Thc l0n grccmcnI usully pr0vdcs I0r pcr0d durng whch 0nly nIcrcsI
wll bc pd nd IIcr whch cpIl rcpymcnI sIrIs. Ths pcr0d s cllcd
0r nd I gvcs Ihc c0mpny cn0ugh Imc
I0 0pcrIc, bcI0rc gcncrIng csh nIl0ws IhI wll bc uscd I0 sIrI lqudIng
Ihc l0n.
Thc l0n grccmcnIs n0rmlly pr0vdc I0r Ihc l0n I0 bc sccurcd by Ixcd
chrgc 0n Ihc c0mpny's spccIc pr0pcrIy 0r Il0Ing chrgc 0n ll Ihc
sscIs 0I Ihc c0mpny, vlublc nd nvlublc.
Ths s Ihc Iypc 0I l0n Inncc, 0bIncd by c0mpny, whcrcby Ihc c0mpny
uscs Is cqupmcnI s c0llIcrl I0r Ihc l0n. Thc cqupmcnI mghI hvc
bccn lrcdy 0wncd by Ihc c0mpny 0r mghI bc b0uI I0 bc purchscd. Thc
Icrms 0I Ihc l0n n0rmlly sprcd nI0 IuIurc ycrs, hcncc, I s IrcIcd s
mcdumIcrm Inncc.
Thc bnk n0rmlly dvnccs 0nly pcrccnIgc 0I Ihc mrkcI vluc 0I Ihc
cqupmcnI I0 crcIc s0mc mrgn 0I sIcIy. whI pcrccnIgc wll bc dvnccd
wll dcpcnd 0n Ihc mrkcIblIy 0I Ihc cqupmcnI (I I wcrc I0 bc s0ld), I
my bc 80, b0 0r 40. Thc rcpymcnI schcdulc I0r Ihc l0n wll bc prcprcd
I0 mIch Ihc cc0n0mc l0ss 0I vluc 0I Ihc cqupmcnI such IhI I ny p0nI
n Imc, Ihc mrkcI vluc 0I Ihc cqupmcnI wll bc m0rc Ihn Ihc blncc 0I
Ihc l0n.
Ths s Ihc Inncc pr0vdcd by Ihc bnk whcrcby Ihc pr0|ccI IsclI scrvcs s
sccurIy I0r Ihc l0n. Thc bnk l00ks I Ihc pr0|ccI csh Il0ws s Ihc mn
s0urcc 0I rcpymcnI. Thc c0mpny's IundmcnIls pr0IIblIy, sscI bsc
rc 0I scc0ndry mp0rIncc.
Thc pr0|ccI sh0uld hvc dcnIIblc csh Il0ws nd Is rsks sh0uld bc
sscssblc. nks usully sk I0r hghcr rcIurns 0n Inncc bccusc 0I Is
IIcndnI hgh rsks. !n ddI0n Ihcy n0rmlly sk I0r d0mclI0n 0I Ihc
csh pr0cccds 0I Ihc pr0|ccI.
89
A lcsc s c0nIrcI whcrcby Ihc 0wncr (Ihc lcss0r) 0I n sscI gvcs n
cxclusvc rghI I0 n0Ihcr pcrs0n (Ihc lcsscc) I0 usc Ihc sscI I0r spccIcd
pcr0d 0I Imc n c0nsdcrI0n I0r scrvccs 0I pymcnIs kn0wn s lcsc
pymcnIs (0r rcnI).
() 0pcrIng lcsc, nd
(b) Fnncl lcsc
Thc dscuss0n n Ihs sIudy pck wll I0cus 0n Ihc Inncl lcsc, lIh0ugh,
I s ncccssry I0 kn0w Ihc dIIcrcncc bcIwccn Ihc Iw0 Iypcs.
Ths s cnccllblc sh0rIIcrm lcsc c0nIrcI usully sh0rIcr Ihn
Ihc uscIul lIc 0I Ihc sscI. Thc c0nIrcI cn bc dcIcrmncd I Ihc
nsIncc 0I Ihc lcsscc pr0vdcd dcquIc n0Icc hd bccn gvcn I0
Ihc lcss0r. Exmplcs 0I 0pcrIng lcsc rc, lcscs 0I ph0I0c0py
mchncs, c0mpuIcr hrdwrc, crs nd s0 0n.
Ths s n0ncnccllblc l0ngIcrm c0nIrcI n whch Ihc pcr0d 0I
Ihc c0nIrcI nd Ihc uscIul lIc 0I Ihc sscI rc Ihc smc. Lcsc
pymcnIs rc mdc Ihr0ugh0uI Ihs pcr0d. !I nd whcn Ihc lcsc
pcr0d cxprcs, Ihc lcsscc my rcIurn Ihc sscI 0r rcncw Ihc lcsc
c0nIrcI 0r purchsc Ihc sscI.
() 0pcrIng lcsc s cnccllblc lcsc whlc Inncl lcsc s
n0ncnccllblc lcsc.
(b) 0pcrIng lcsc s sh0rIIcrm lcsc whlc Inncl lcsc s
l0ngIcrm c0nIrcI.
(c) !n 0pcrIng lcsc Ihc lcss0r s rcsp0nsblc I0r rcprs,
mnIcnncc, nsurncc whlc n Inncl lcsc Ihc lcsscc s
rcsp0nsblc I0r crryng 0uI Ihcsc cIvIcs.
90
Thc mn Iypcs 0I Inncl lcsc rc drccI lcsc, slc nd lcsc
bck nd lcvcrgcd lcsc.
()
Ths s Ihc n0rml Iypc 0I lcsc n whch Ihc mnuIcIurcr 0r
Ihc lcss0r (whch my bc bnk, Inncc c0mpny 0r
lcsng c0mpny) gvcs Ihc lcsscc Ihc rghI I0 usc n sscI.
Thc Il0w 0I IrnscI0n hcrc s IhI pcrs0n (0Ihcr Ihn Ihc
mnuIcIurcr) cqurcs 0wncrshp 0I Ihc sscI, sclls I I0
lcss0r wh0 n Iurn lcscs Ihc sscI I0 Ihc lcsscc n rcIurn I0r
pcr0dc lcsc pymcnIs.
(b)
!n Ihs I0rm 0I lcsc, Ihc lcssccc0mpny s Ihc 0rgnl 0wncr
0I Ihc sscI. Thc c0mpny nccds csh nd I Ihc smc Imc
wnIs c0nInucd usgc 0I Ihc sscI. !I Ihcn sclls Ihc sscI I0
Ihc lcss0r c0mpny nd lcscs I bck Ir0m Ihc lcss0rc0mpny
undcr Ihc usul Icrms 0I lcsc. y Ihs rrngcmcnI Ihc lcsscc
wll bc blc I0 gcI b0Ih csh nd c0nInucd cccss I0 Ihc sscI.
(c)
!n lcvcrgcd lcsc Ihcrc rc Ihrcc prIcs nv0lvcd Ihc
lcsscc, Ihc lcss0r nd l0ngIcrm lcndcr. Thc lcss0r 0I Ihc sscI
puIs d0wn 0nly ccrIn pcrccnIgc 0I Ihc c0sI 0I Ihc sscI sy
20 nd b0rr0ws Ihc blncc Ir0m Ihc lcndcr.
Thc sscI nd ssgnmcnI 0I Ihc lcsc pymcnIs rc uscd s
c0llIcrl I0r Ihc b0rr0wng. Thc lcsscc's p0sI0n s, h0wcvcr,
n0I IIccIcd by Ihs spccl rrngcmcnI.
Lcvcrgcd lcsng s uscd n Inncng vcry cxpcnsvc sscIs
such s rcrII, shps, rgs, rlwy cqupmcnI nd dvncc
mnuIcIurng Icchn0l0gy (AMT) pr0|ccIs.
Thcrc rc Imcs whcn Inncl mngcrs hvc I0 mkc dccs0n 0n
whcIhcr I0 lcsc n sscI 0r I0 0uIrghIly buy Ihc sscI.
Thcrc rc Iw0 scprIc buI nIcrrclIcd dccs0ns nv0lvcd:
9
()
Ths nv0lvcs dcnIIyng Ihc chcpcr mcIh0d 0I Inncng Ihc
sscI ssumng dccs0n hs bccn Ikcn I0 lcsc Ihc sscI 0r
I0 purchsc I 0uIrghI prcsumbly Ihr0ugh b0rr0wng.
(b) n
Ths nv0lvcs cvluIng Ihc cc0n0mc vblIy 0I Ihc sscI
usng Ihc ppr0prIc dsc0unIcd csh Il0w mcIh0d (Ihc ncI
prcscnI vluc) wIh Ihc rghI dsc0unI rIc.
Thc sIcps cnIlcd n lcsc 0r buy dccs0n rc s I0ll0ws:
() 0cIcrmnc Ihc pIIcrns 0I csh Il0ws I0r cch
Inncng mcIh0d n Icrms 0I Ihcr mgnIudc nd
Imng.
(b) 0cIcrmnc Ihc 0pp0rIunIy c0sI 0I Iunds (Ihc
dsc0unI rIc) I0r Ihc dcbI Inncc. !I Ihc c0mpny
s n Ixblc p0sI0n, Ihc rclcvnI c0sI s Ihc
IIcrIx c0sI 0I dcbI cpIl.
(c) !n Ihc csc 0I 0uIrghI purchsc, clculIc Ihc
ppr0prIc cpIl ll0wnccs I0r Ihc sscI nd
Ihc Ix shcld 0n cch 0I Ihc ll0wnccs n0Ing
IhI Ix pymcnIs rc n0rmlly n rrcrs.
(d) 0cIcrmnc Ihc ncI csh Il0w I0r cch ycr.
(c) Usng Ihc rclcvnI IIcrIx c0sI 0I cpIl,
clculIc Ihc dsc0unI IcI0r I0r cch ycr.
(I) Apply Ihc dsc0unI IcI0r I0r cch ycr I0 Is ncI
csh Il0w I0 0bIn Ihc prcscnI w0rIh 0I cch
ycr's csh Il0w.
(g) Add up cch ycrs P\ I0 gcI Ihc ggrcgIc IIcr
Ix c0sI 0I dcbI Inncc.
(h) !n Ihc csc 0I lcsng, dcIcrmnc Ihc lcsc
pymcnI I0r cch ycr n0Ing IhI lcsc pymcnIs
rc usully mdc n dvncc.
92
() Usng Ihc c0mpny's Ix rIc, clculIc Ihc Ix
shcld 0n cch lcsc pymcnI n0Ing IhI Ix
pymcnIs rc n0rmlly n rrcrs.
(|) 0cIcrmnc I0r cch ycr Ihc ncI csh Il0w, Ihc
dsc0unI IcI0r nd Ihc P\s 0I cch csh Il0w.
(k) Add up cch 0I Ihc P\s I0 rrvc I Ihc ggrcgIc
IIcrIx c0sI 0I lcsc Inncc.
(l) C0mprc Ihc IIcrIx c0sI 0I dcbI Inncc wIh
Ihc IIcrIx c0sI 0I lcsc Inncc I0 gcI Ihc
chcpcr mcIh0d 0I Inncc.
Thc sIcps rc:
() 0cIcrmnc Ihc prcIx 0pcrIng csh Il0w I0r cch
ycr.
(b) 0cIcrmnc Ihc IIcrIx c0sI 0I cpIl I0r Ihc sscI
n Ihc smc rsk clss (ssumng Ihc c0mpny s
n Ixblc p0sI0n).
(c) ClculIc Ihc Ix pyblc 0n cch ycr's csh Il0w
n0Ing IhI Ix s cIully pd n rrcrs.
(d) ClculIc Ihc IIcrIx csh Il0w I0r cch ycr.
(c) Usng Ihc IIcrIx c0sI 0I cpIl, clculIc Ihc
dsc0unI IcI0r I0r cch ycr.
(I) MulIply Ihc ncI 0pcrIng csh Il0w 0I cch ycr
by Is rclIcd dsc0unI IcI0r I0 Is P\.
(g) Add up Ihc P\s wIh Ihc c0sI 0bIncd Ihr0ugh Ihc
chcpcr mcIh0d 0I Inncng.
(h) !I Ihc b0vc sIcp rcsulIs n p0sIvc NP\, cccpI
Ihc pr0|ccI, I n0I rc|ccI I.
93
0AAP Plc plns I0 cqurc ncw mchnc 0n 1nury . Thc c0sI 0I Ihc
mchnc s cxpccIcd I0 bc N2.5 mll0n. whcn Ihc mchnc s puI nI0 usc,
Ihc c0mpny plns I0 n|ccI n0Ihcr N300,000 s w0rkng cpIl I0r Ihc
wh0lc lIc 0I Ihc mchnc. 0ncc Ihc mchnc sIrIs 0pcrI0n, Ihc c0mpny
cxpccIs IhI I (Ihc mchnc) wll gcncrIc ddI0nl prcIx 0pcrIng ncI
csh Il0ws s I0ll0ws:
Ycr N,025,000
2 N,43,000
3 N,20,500
4 N,70,500
Thc c0mpny s c0nsdcrng whcIhcr I0 lcsc 0r buy Ihc mchnc. !I Ihc
mchnc s I0 bc lcscd Ihc c0mpny (lcsscc) w0uld mkc n nnul lcsc
pymcnI 0I N750,000 pcr nnum I0r 4 ycrs, wIh cch pymcnI I Ihc
bcgnnng 0I Ihc rcspccIvc ycr. !I Ihc mchnc s I0 bc b0ughI, Ihc c0mpny
w0uld rrngc I0r Icrm l0n I Ixcd rIc 0I nIcrcsI 0I 20 pcr nnum.
Thc mchnc s n0I cxpccIcd I0 hvc ny slvgc vluc. Thc c0mpny bclcvcs
IhI Ihc ppr0prIc IIcrIx c0sI 0I cpIl I0r mchnc n Ihc smc rsk
clss s Ihc 0nc I0 bc b0ughI s 22 pcrccnI. C0mpny Ix s 30, pyblc 0nc
ycr n rrcrs.
CpIl ll0wnccs rc vlblc s I0ll0ws:
50 nIl ll0wncc nd 25 nnul ll0wncc 0n rcducng blncc bss.
Thcsc ll0wnccs hvc bccn clculIcd s I0ll0ws:
,250,000 32,500
2 234,375
3 75,78
4 3,83b
* lncng All0wncc
Advsc whcIhcr Ihc mchnc sh0uld bc b0ughI 0r lcscd.
94
0 (2,500,00) (2,500,000) .000 (2,500,000)
,5b2,500 0.877
2 234,375 4b8,750 4b8,750 0.7b9 3b0,4b9
3 75,78 70,33 70,33 0.b75 47,4b
4 3,83b 52,734 52,734 0.592 3,29
395,508
5 58,203 58,203 0.59 82,07
0 (750,000) (750,000) .000 (750,000)
(750,000) 225,000 (525,000) 0.877 (4b0,425)
2 (750,000) 225,000 (525,000) 0.7b9 (403,725)
3 (750,000) 225,000 (525,000) 0.b75 (354,375)
4 225,000 225,000 0.592 (33,200)
scd 0n Ihc b0vc clculI0ns, I wll bc chcpcr I0 buy. uyng hs
l0wcr csh 0uIIl0w n prcscnI vluc Icrms.
0 (,978,744) (2,278,744) .000 (2,278,744)
(300,000)
,025,000 ,025,000 0.820 840,500
2 ,43,000 307,500 835,500 0.b72 5b,45b
3 ,20,500 342,900 8b7,b00 0.55 478,048
4 ,70,500 3b3,50 ,07,350 0.45 499,45
300,000
5 35,50 (35,50) 0.370 (2992b)
95
Thc c0mpny sh0uld n0I g0 hcd I0 0bIn Ihc usc 0I Ihc mchnc sncc Is
usc wll dccrcsc Ihc vluc 0I Ihc c0mpny by N29,25.
() !I s ssumcd IhI nvcsI0rs scc Ihc lcsc nd Ihc Icrm l0n s pcrIccI
subsIIuIcs I0r cch 0Ihcr Ir0m Ihc sInd p0nI 0I cpIl sIrucIurc nd
Ihc rskncss 0I Ihc csh Il0ws. Thc smc dsc0unI rIc s, IhcrcI0rc,
uscd I0r b0Ih lcsng nd buyng Ihr0ugh b0rr0wng.
(2) Sncc Ihc c0mpny s n Ixblc p0sI0n, Ihc c0rrccI c0sI 0I dcbI
cpIl I0 usc sh0uld bc Ihc IIcrIx c0sI, IhI s 20 (0.30) = 4.
(3) Thc dsc0unI rIc IhI sh0uld bc uscd I0 0bIn Ihc P\ 0I Ihc mchnc's
csh Il0ws s Ihc IIcrIx c0sI 0I cpIl rclIng I0 Ihcsc csh Il0ws. A
dIIcrcnI dsc0unI rIc 0I 22 s uscd bccusc Ihc csh Il0ws 0I Ihc
lcsc nd l0n pymcnIs hvc dIIcrcnI lcvcl 0I rsk Ir0m Ihc csh
Il0w 0I Ihc mchnc. Thc csh Il0ws 0I Ihc I0rmcr rc dccmcd m0rc
ccrIn.
(4) Thc w0rkng cpIl s usully IrcIcd s csh 0uIIl0w I Ihc bcgnnng
0I Ihc cc0n0mc lIc 0I Ihc mchnc nd csh nIl0w I Ihc cnd.
() Thc lcsscc nccds n0I Ic d0wn lrgc m0unI 0I m0ncy.
(b) Thc lcsscc c0mpny hs cccss I0 Ihc usc 0I n sscI whcn
cIhcr I cn II0rd I0 buy I 0r Is b0rr0wng cpcIy hs bccn
sIrcIchcd I0 Ihc lmI.
(c) Lcsc pymcnIs rc ll0wcd I0r Ix purp0scs nd Ihs mkcs
lcsng Ix cIIccnI.
(d) Thc lcsscc my bc pyng l0wcr lcsc rcnIls s rcsulI 0I
prI 0I cpIl ll0wncc psscd 0n I0 I by Ihc lcss0r.
(c) !n slc nd lcsc bck rrngcmcnI Ihc lcsscc my bc blc
I0 smulInc0usly rsc csh nd sIll c0nInuc I0 usc Ihc sscI.
(I) Thc lcsscc s blc I0 v0d Ihc rsk 0I 0bs0lcsccncc IhI s Iypcl
0I 0uIrghI 0wncrshp 0I s0mc sscIs.
Lcscs rc usully vcry cxpcnsvc s lcsc pymcnIs c0nIn b0Ih
nIcrcsI nd pr0IIs I0 Ihc lcss0r.
9b
C0mpncs nccd mcdumIcrm Inncc I0 bc blc I0 Inncc sscIs IhI rc
Irly pcrmncnI n nIurc. Thc mn mcdumIcrm s0urccs 0I Inncc rc
cqupmcnI Inncc, pr0|ccI Inncc nd, m0sI mp0rInIly, lcsc Inncc. Ech
0I Ihcsc s0urccs hs Is 0wn unquc chrcIcrsIcs. !n prIculr, lcsc Inncc
hs bccn IrcIcd s mcdum Icrm s0urcc 0I Inncc bccusc I s vcwcd s
n lIcrnIvc I0 Icrm l0n. Thcrc rc Iw0 m|0r Iypcs 0I lcsc Ihc 0pcrIng
lcsc nd Ihc Inncc lcsc.
Thc mn I0cus 0I Inncl mngcrs s Ihc Inncc lcsc. Ths s Ihc lcsc
wh0sc usgc pcr0d c0ncdcs wIh Ihc cc0n0mc lIc 0I Ihc sscI lcscd nd
s IhcrcI0rc n0I lkcly I0 hvc ny slvgc vluc I Ihc cnd 0I Is lIc. Thc
mn dccs0n c0nIr0nIng Inncl mngcrs, hcrc, s whcIhcr I0 lcsc 0r
buy Ihc sscI IhI s nccdcd I0r 0pcrI0ns. !I s n0I 0nc0II dccs0n. Thcrc
rc Iw0 dccs0ns nv0lvcd whcIhcr I0 lcsc 0r b0rr0w (Inncng) nd
whcIhcr I0 cqurc Ihc sscI 0r n0I (nvcsIng). Thc IIcr Ix c0sI 0I lcsng
wll bc c0mprcd wIh Ihc IIcrIx c0sI 0I b0rr0wng I0 sccrIn Ihc chcpcr
mcIh0d 0I Inncng. Thcn Ihc nvcsImcnI IsclI wll bc cvluIcd I0 scc
whcIhcr I gvcs p0sIvc NP\ nd IhcrcI0rc sh0uld bc cccpIcd. Thcrc rc
dvnIgcs nd dsdvnIgcs ccrung I0 lcsscc nd Ihcsc wcrc
hghlghIcd.
5.7.
. McdumIcrm bnk l0n c0uld bc sd I0 bc l0n I0r
() lcss Ihn 0nc ycr
() m0rc Ihn 0nc ycr
() pcr0d 0vcr 0nc ycr buI n0I Ixcd
A () 0nly
() nd ()
C () 0nly
0 () nd ()
E () 0nly
2. whI s Ihc nmc gvcn I0 Ihc Inncng 0I prIculr Ixcd sscI whcrc
IhI Ixcd sscI s uscd s c0llIcrl.
() Fxcd sscI Inncng
() L0ngIcrm Inncng
() EqupmcnI Inncng
97
A () 0nly
() 0nly
C () nd ()
0 () nd ()
E () 0nly
3. A n0ncnccllblc l0ngIcrm lcsc s cllcd:
A 0pcrIng lcsc
L0ngIcrm lcsc
C Fxcd sscI lcsc
0 0pcrIng sscI lcsc
E Fnncc lcsc
4. whcn cvluIng lcsc 0r buy cpIl pr0|ccI nd b0rr0wng s IrcIcd
s lIcrnIvc I0 lcsng, whI s Ihc dsc0unI rIc I0 usc n Ihc
dsc0unIng 0I Ihc lcsc csh Il0ws!
() c0mpny's c0sI 0I cpIl
() c0sI 0I b0rr0wng
() c0sI 0I b0rr0wng 0r c0sI 0I cpIl
A () 0nly
() nd ()
C () 0nly
0 () nd ()
E () 0nly
5. whcrc c0mpnylcsscc s n pcrmncnI n0nIxblc p0sI0n, whI
sh0uld bc Ihc c0rrccI c0sI 0I dcbI cpIl I0 usc!
() bcI0rc Ix c0sI 0I dcbI
() IIcr Ix c0sI 0I dcbI
() 0vcrll IIcr Ix c0mpny's c0sI 0I cpIl
A () 0nly
() 0nly
C () 0nly
0 () nd ()
E () nd ()
5.7.2
. !n lcsc 0r buy cpIl pr0|ccI pprsl, sIIc Ihc Iw0 prncpl sIcps
nv0lvcd n Ihc cvluI0n pr0ccss.
2. !n Icrms 0I prIcs I0 Iypcl lcsc grccmcnI, whI s Ihc dIIcrcncc
bcIwccn drccI lcsng nd lcvcrgcd lcsng!
3. SIIc 0nc prcIcl dsdvnIgc 0I lcsng.
4. !n pr0|ccI Inncng, whI s Ihc mn sccurIy I0r Ihc Iunds pr0vdcd
nd h0w c0uld Ihs sccurIy bc pcrIccIcd!
5. !n Ihc b0rr0wng 0pI0n (0I lcsc 0r buy dccs0n) nv0lvng Ixcd cqul
nnul nsIlmcnIs, gvc Ihc c0mp0ncnIs 0I Ihc Ix shcld bcncIIs.
99
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ Expln Ihc mcnng nd nIurc 0I c0sI 0I cpIl,
+ 0cscrbc h0w rsk s nc0rp0rIcd nI0 Ihc c0sI 0I cpIl,
+ EsImIc Ihc c0sIs 0I Ihc m|0r ndvdul s0urccs 0I cpIl dcbI, prcIcrcncc
shrcs nd 0rdnry shrcs cIc,
+ EsImIc Ihc wcghIcd vcrgc c0sI 0I cpIl (wACC), nd
+ Expln Ihc |usIIcI0n I0r Ihc usc 0I wACC.
!n cpIl nvcsImcnI pprsl, dsc0unI rIc ws uscd I0r dsc0unIng
Ihc IuIurc csh Il0ws 0I pr0|ccI wIh vcw I0 dcIcrmnng Is NP\. Undcr
Ihc !RR mcIh0d "cuI0II rIc" ws ssumcd 0r gvcn I0r c0mprs0n wIh
Ihc !RR 0I Ihc pr0|ccI. 0Ih ppr0chcs wcrc mcd I dcIcrmnng Ihc
cccpIblIy 0r 0Ihcrwsc 0I Ihc pr0|ccI nd Is cvcnIul cIIccI 0n Ihc Irm's
vluc nd, IhcrcI0rc, 0n Ihc wclIh 0I Is shrch0ldcrs.
Ths dsc0unI rIc 0r cuI0II rIc s Ihc csc my bc s Ihc c0mpny's c0sI 0I
cpIl. !n nvcsImcnI pprsl I s gvcn 0r ssumcd buI n Ihs chpIcr,
whI Ihs c0nccpI mcns nd h0w I cn bc csImIcd wll bc dscusscd.
Thcrc s lnk bcIwccn Ihc nvcsImcnI 0pp0rIunIcs undcrIkcn by c0mpny
nd Ihc Iunds IhI supp0rI Ih0sc 0pp0rIunIcs. Thc Iunds rc 0bIncd v
Inncl sscIs ssucd I0 ndvdul gr0ups 0I nvcsI0rs IhI purchsc Ihcsc
sscIs. Thcsc nvcsI0rs rcqurc ccrIn mnmum rIcs 0I rcIurns 0n Ihcr
nvcsImcnIs. Thc pr0|ccI's rcIurn musI chcvc Ihcsc mnmum rIcs I Ihcy
hvc I0 bc cccpIblc. Ths dcsrcd mnmum rIc (I0r prIculr gr0up) s
Ihc Irm's c0sI 0I cpIl pr0vdcd by IhI gr0up. Thc symb0l n0rmlly uscd
I0r c0sI 0I cpIl s 'K'.
Thc kcy qucsI0n Inncl mngcrs IIcmpI I0 nswcr s: whI s 'K' nd
h0w sh0uld I bc mcsurcd.
200
C0sI 0I cpIl s kn0wn s Ihc mnmum dcsrcd (rcqurcd) rIc 0I rcIurn.
\n H0rnc (2003) dcIncs I s "Ihc rIc 0I rcIurn 0n Ihc pr0|ccI IhI wll
lcvc unchngcd Ihc mrkcI prcc 0I Ihc Irm's sI0ck". Thcrc rc, h0wcvcr,
dIIcrcnccs 0I 0pn0n 0n h0w c0sI 0I cpIl sh0uld bc mcsurcd.
C0sI 0I cpIl s n 0pp0rIunIy c0sI c0nccpI. !I s vcwcd s Ihc rcIurn whch
Ihc pr0vdcrs 0I Ihc cpIl c0uld crn 0n Ihcr ncxI bcsI lIcrnIvc
nvcsImcnIs. Thus, c0sI 0I cpIl s Ihc 0pp0rIunIy c0sI 0I Iunds I0 bc nvcsIcd
n pr0|ccI nd c0mp0sIc, buI n 'vcrgc c0sI. !I s n vcrgc c0sI 0I Ihc
ndvdul s0urccs 0I cpIl, wcghIcd by Ihc m0unI 0I cch s0urcc wIhn
Ihc 0vcrll cpIl sIrucIurc 0I Ihc Irm. Thus, Ihc c0sI 0I cch spccIc s0urcc
0I cpIl wll bc c0mpuIcd IrsI bcI0rc clculIng Ihc wcghIcd vcrgc
c0sI 0I cpIl (wACC).
A m|0r pr0blcm n mcsurng c0sI 0I cpIl s h0w I0 nc0rp0rIc unccrInIy
(rsk). Thcrc rc Ihrcc c0mp0ncnIs 0n Ihs c0sI:
() Ihc rIc dcsrcd Ir0m sccurIy whch s I0Illy
Ircc 0I rsk.
(b) n ncrcsc n Ihc rIc 0I rcIurn
rsng Ir0m unccrInIy b0uI Ihc IuIurc crnngs 0I Ihc Irm. Thngs
my n0I hppcn s cxpccIcd, hcncc Ihcrc s nccd I0r ddI0nl rcIurn
I0 c0mpcnsIc Ihc nvcsI0r I0r Ihc Iypc 0I rsk.
(c) IurIhcr ncrcsc n Ihc rIc 0I
rcIurn whcrc Ihc Irm b0rr0ws nd IhcrcI0rc s cxp0scd I0 Ihc dngcr
0I bcng lqudIcd. Ths mcns, I0r 0rdnry shrch0ldcrs, vrblIy
n Ihc crnngs vlblc I0r Ihcm IIcr dcducIng Ihc IxcdnIcrcsI
0blgI0ns 0I Ihc Irm. Thc hghcr Ihc lcvcl 0I Irm's Inncl
lcvcrgc, Ihc grcIcr wll bc Ihc Inncl rsk I0 Ihc 0rdnry
shrch0ldcrs. Thc rsk prcmum IhI s rcqurcd wll bc hghcr nd
Ihc c0sI 0I cpIl wll c0nscqucnIly rsc. Ech c0mpny wll hvc Is
0wn c0sI 0I cpIl, dcpcndng 0n Ihc Iypc 0I busncss I d0cs nd Ihc
lcvcl 0I Is gcrng, cvcn I ll nvcsI0rs hvc Ihc smc mrgnl rIc
0I Imc prcIcrcncc. Pr0vdcrs 0I dcbI cpIl w0uld n0rmlly dcmnd
I0r l0wcr rsk prcmum Ihn IhI rcqurcd by 0rdnry shrch0ldcrs.
!n nc0rp0rIng rsk, I s usul I0 IrsI clculIc Ihc wcghIcd vcrgc
c0sI 0I cpIl whch ncludcs: rsk I0 nvcsI0r nd Ihcn dd IurIhcr
prcmum I0r rsk I0 ll0w I0r Ihc vrblIy 0I Ihc csh Il0ws. !I I0r
nsIncc, Ihc Irm's wACC s 0 pcr ccnI, Ihc drccI0rs my ncrcsc
Ihs by 5 nd pprsc Ihc pr0|ccI by dsc0unIng I 5 pcrccnI.
20
Thc ppr0ch I0 mcsurng Ihc 0vcrll c0sI 0I cpIl 0I Irm s I0 IrsI
clculIc Ihc c0sI 0I spccIc s0urccs 0I Iunds IhI mkc up Ihc cpIl sIrucIurc
0I IhI Irm.
Ech c0sI wll bc clculIcd n Icrms 0I rcqurcd (0r cxpccIcd) rcIurn 0r ycld
0I Ihc sccurIy nv0lvcd. Ths sIudy pck l00ks I Ihrcc mn s0urccsl0ng
Icrm dcbI, prcIcrcncc shrcs nd 0rdnry shrcs (ncludng rcIncd
crnngs). !I sh0uld bc n0Icd IhI I s Ihc ncrcmcnIl c0sI 0I ddI0nl dcbI
0r prcIcrcncc cpIl 0r cquIy, IhI s, mrgnl c0sI, s gnsI hsI0rcl
c0sI 0I cxsIng dcbI 0r shrc cpIl, IhI s rclcvnI whcn clculIng Ihcsc
c0sIs.
Ths s Ihc dsc0unI rIc (K
d
) IhI cquIcs Ihc prcscnI vluc 0I IuIurc
nIcrcsI pymcnI plus prncpl rcpymcnI wIh Ihc currcnI mrkcI
vluc (prcc) 0I Ihc dcbI. K
d
s ls0 kn0wn s mrkcI rIc 0I nIcrcsI 0r
ycldI0mIurIy (YMT) nd s s0lvcd, usng Ihc I0ll0wng I0rmul:
( ) ( ) ( ) ( ) ( )
n
d
n
n
d
n
3
d
3
2
d
2
d

0
K
P
K
!
..........
K
!
K
!
K
!
P
+
+
+ +
+
+
+
+
=
whcrc s Ihc currcnI mrkcI prcc 0I Ihc dcbIs
s Ihc nIcrcsI pymcnI.
s Ihc ycr 0I rcdcmpI0n 0I Ihc dcbI
s Ihc prncpl m0unI 0I Ihc dcbI
I0 bc rcdccmcd n ycr 'n'.
Ths I0rmul s I0r rcdccmblc dcbI. !I s c0mplcx cquI0n. K
d
cn 0nly
bc clculIcd mnully by usng Irlndcrr0r ppr0ch s n !RR. Evcn
Ihcn, I wll bc n ppr0xmIc Igurc.
Thc ppr0ch nv0lvcs (ssumng Ihc dcbI s rrcdccmblc) clculIng Is
c0sI nd Ihcn ddng n nnulscd cpIl gn IhI wll bc mdc Ir0m
prcscnI Imc I0 mIurIy. !n Ihs csc, Ihc I0ll0wng I0rmul cn bc uscd I0r
YMT.
dcmpI0n Rc I0 Ycrs
dcmpI0n Rc I0 ) L0ss ( 0n CpIl
ycld !nIcrcsI +
Ths s Ihc sIrIng p0nI I0wrds usng Ihc Irl nd crr0r ppr0ch,
202
Hcrc, K
d
s smply Ihc nIcrcsI 0r currcnI 0r IlI ycld 0I Ihc dcbI nd
Ihc I0rmul s s I0ll0ws:
K
d
=
0
P
!
Alcn plc hs n ssuc 5 dcbcnIurcs wIh pr vluc 0I 000.00.
Thc currcnI mrkcI prcc s 900.00 cx nIcrcsI. EsImIc Ihc c0sI 0I
Ihs cpIl ssumng.
. !I s rrcdccmblc
b. !I s rcdccmblc I pr n 209. !gn0rc Ix
. C0sI 0I dcbI cpIl
00 x
900
50
P
!
K
0
d
= =
b. C0sI 0I dcbI cpIl s b.b7 I rrcdccmblc. Thc vcrgc gn
I0 bc mdc Ir0m n0w I0 rcdcmpI0n dIc
=
0
900 000 ,
Thc bcsI csImIc I0 sIrI wIh s 2b.b7
AI sy 2b Ihc NP\ 0I nIcrcsI 0I N50 pcr nnum I0r 0 ycrs plus Ihc
prncpl rcpymcnI 0I N,000 I Ihc cnd 0I Ihc IcnIh ycr s: N50 (3.4b5)
+ N,000 (0.099) =Nb9,
ThI s, lcss Ihn N900.00. AI sy b Ihc NP\ 0I nIcrcsI 0I N50 pcr nnum
I0r 0 ycrs plus Ihc prncpl rcpymcnI 0I N000 I Ihc cnd 0I Ihc IcnIh
ycr s N50 (4.833) + N,000 (0.227)
= N952, IhI s, grcIcr Ihn N900
y nIcrp0lI0n, Ihc csImIcd c0sI 0I Ihs dcbI
=
00 x
57
952
b |
.
|

\
|
+
= b+b.0b
=22.0b
N N
203
) Thc c0sI 0I cpIl csImIcd b0vc ssumcs:
. ThI Ihc Irm wll c0nInuc I0 usc Ihc dcbI Inncc nd n0I
rcdccm Ihc sccurIcs I Ihcr currcnI mrkcI prcc.
. ThI Ihc c0sI 0I rsng ddI0nl cpIl w0uld bc cqul I0
Ihc c0sI 0I Ihc 0nc n cxsIcncc.
b) Thc c0sI 0I dcbI cpIl s clculIcd s Ihc rcqurcd rIc 0I rcIurn 0I
lcndcrs I0 Ihc c0mpny nd I s bcI0rcIx c0sI 0I dcbI. Ths s Ihc
rclcvnI c0sI I0r c0mpny wIh n0 Ixblc nc0mc, IhI s, n
pcrmncnI n0nIxblc p0sI0n.
Sncc nIcrcsI 0n dcbI cpIl s Ix dcducIblc cxpcnsc, Ihc c0sI 0I
dcbI cpIl I0 bc pr0pcrly c0mprcd wIh Ihc c0sI 0I cquIy cpIl,
musI bc d|usIcd I0r Ix s0 IhI, n IIcrIx c0sI 0I dcbI s clculIcd.
Assumng n rrcdccmblc dcbI, Ihc I0rmul wll bc:
( )
0

P
I !
k

=
whcrc s Ihc IIcrIx c0sI 0I dcbI
s Ihc nnul nIcrcsI pymcnI
s currcnI mrkcI prcc 0I Ihc dcbI cpIl (IIcr pymcnI 0I
Ihc currcnI nIcrcsI)
I s Ihc c0mpny's Ix rIc.
A c0mpny hs n ssuc 2 rrcdccmblc dcbcnIurc sI0ck wIh Icc vluc
0I Nm nd mrkcI prcc 0I N0.8 m. !I Ihc c0mpny's Ix rIc s 30, whI
s Ihc c0sI 0I Ihc dcbcnIurc cpIl!
!nIcrcsI pymcnI pcr nnum s 000 , 000 , N x
00
2
= N20,000
( )
000 , 800
30 . 0 000 , 20
k

=
=
000 , 800
000 , 84
= 0.05 0r 0.5
N
N
N
204
whcrc Ihc dcbcnIurc s rcdccmblc nv0lvng cqul pcr0d rcpymcnIs
IhI c0mprsc b0Ih cpIl nd nIcrcsI, Ihc cpIl clcmcnI s n0I
ll0wcd I0r Ix purp0sc. 0nly Ihc nIcrcsI wll IIrcI Ix bcncII. !n
Ihs csc, I mghI bc ncccssry I0 clculIc Ihc nIcrnl rIc 0I rcIurn
(!RR) IhI rcIlccIs Ihc Ix shcld bcncIIs 0I nIcrcsI.
Ths s Ihc mrkcI dcIcrmncd rcIurn 0r smply ycld, 0I Ihs clcmcnI
0I cpIl. !I dcpcnds 0n Ihc sIIcd dvdcnd (n IIcrIx vrblc)
nd Ihc cpIl I0 whch I rclIcs, hs n0 rcdcmpI0n dIc. !I s
IhcrcI0rc rcprcscnIcd s I0ll0ws:
0
P
p
P
0
K =
whcrc
p
0 s Ihc sIIcd nnul dvdcnd nd
0
P s Ihc currcnI mrkcI
prcc 0I prcIcrcncc shrc.
A c0mpny hs n ssuc 5 prcIcrcncc shrc 0I N cch I b00k
vluc 0I N!m. !I ncw prcIcrcncc shrcs hvc I0 bc s0ld, cch shrc
wll scll I 90k pcr shrc. whI s Ihc c0sI 0I prcIcrcncc shrc!
Usng Ihc I0rmul
0
P
p
P
0
K =
, Ihc c0sI wll bc cqul I0
=
00 x
90 . 0
5 . 0
= b.b7
N0Ic IhI Ihs c0sI s n0I d|usIcd I0r Ix bccusc prcIcrcncc dvdcnd
s n ppr0prI0n 0I pr0II, rIhcr Ihn chrgc gnsI pr0II.
Ths m0dcl ssumcs IuIurc c0nsInI dvdcnd pcr shrc pcr ycr
pcrpcIully. !I vlucs shrc usng Ihc I0ll0wng I0rmul:
( ) ( ) ( ) ( )
n
c
n
3
c
3
2
c
2
c

0
K
0
.. ..........
K
0
K
0
K
0
P
+ +
+
+
+
+
=
( )

=
+
I
I
c
I
K
0
205
whcrc:
P
0
s Ihc currcnI mrkcI prcc 0I Ihc shrc cxdv.
K
c
s Ihc shrch0ldcrs' mrgnl rIc 0I Imc prcIcrcncc 0r c0sI 0I cquIy
cpIl
0
I
s Ihc dvdcnd pcr shrc whch s cxpccIcd I0 bc pd I Ihc cnd 0I
ycr nd

rcprcscnIs Ihc sum 0I Ihc dsc0unIcd IuIurc dvdcnds

s Ihc symb0l I0r pcrpcIuIy

Ths I0rmul whcn smplIcd bcc0mcs
c
0
K
d
P =
0
c
P
d
K =
C0sI 0I cquIy cpIl cn bc, n lnc wIh Ihs I0rmul, dcIncd s Ihc
mnmum rIc 0I rcIurn (ncludng rsk prcmum) whch musI bc
crncd 0n pr0|ccI I0 cnsurc Ihc mnIcnncc 0I Ihc mrkcI vluc 0I
cxsIng shrcs.
KS Plc s cxpccIcd I0 py c0nsInI nnul ncI dvdcnd 0I 50k pcr
0rdnry shrc nI0 n ndcInIc IuIurc Imc. Thc currcnI mrkcI prcc
pcr shrc s N5 cxdv. whI s Ihc c0sI 0I cquIy!
C0sI 0I cquIy =
0 0r 0 . 0
500
50
=
Shrch0ldcrs usully cxpccI Ihcr dvdcnds I0 ncrcsc 0vcr Imc
nsIcd 0I rcmnng Ihc smc ndcInIcly. Sncc Ihc mrkcI prcc 0I
shrc s Ikcn I0 bc Ihc dsc0unIcd IuIurc csh rcccpIs Ir0m Ihc
shrc, Ihcn, Ihc mrkcI vluc 0I shrc gvcn n cxpccIcd gr0wIh n
dvdcnds w0uld bc:
( ) ( ) ( )
( )

+
+
+
+
+
+
+
+
+
+
=

n
c
n

3
c
2

2
c

0
k
g d
) k (
g d
) k (
g d
) k (
d
P
whch rcduccs I0:
g k
d
P
c

=
20b
Rc rrngng Ihs, Ihc 0rdnry shrch0ldcrs' c0sI 0I cpIl, whcrc
c0nsInI rIc 0I gr0wIh n dvdcnds s cxpccIcd, cn bc 0bIncd s
I0ll0ws:
g
P
d
K
0

c
+ =
whcrc:
d

s Ihc dvdcnd cxpccIcd I0 bc pd I Ihc cnd 0I ycr ,

K
c
s Ihc c0sI 0I cquIy cpIl
g s Ihc c0nsInI gr0wIh.
() whcrc Ihc dvdcnd hs |usI bccn pd 0r s rcccnI 0r currcnI
dvdcnd, Ihs s d
0
nd musI bc d|usIcd I0r gr0wIh rIc durng
ycr ! I0 bcc0mc 0
0
(+g) 0rd,
(b) P
0
s mrkcI prcc cx dv. I Ihc prcc ncludcs Ihc ncxI dvdcnd
I0 bc pd IhI s cumdv prcc, Ihs prcc hs I0 bc clcncd by
rcm0vng Ihs dvdcnd.
A c0mpny's 0rdnry shrcs rc currcnIly bcng s0ld I N4 pcr shrc
0n Ihc sI0ck mrkcI. Thc c0mpny s cxpccIcd I0 py dvdcnd 0I
N0.b0 pcr shrc I Ihc cnd 0I Ihc ycr. FuIurc dvdcnds rc cxpccIcd
I0 gr0w I n nnul rIc 0I b pcrccnI 0I Ihc pr0r ycr's dvdcnd.
EsImIc Ihc c0sI 0I 0rdnry shrcs 0I Ihc c0mpny.
g
P
d
K
0

c
+ =
=
0b . 0
00 . 4
b0 . 0
+
= 0.5 + 0.0b
= 0.2 0r 2
207
Thc smplsIc ssumpI0ns 0I pcrpcIul c0nsInI dvdcnd nd c0nsInI
gr0wIh m0dcls rc n0I rcl, s dvdcnds rc usully ncrcscd 0vcrImc by
Ihc c0mpny nd rc ll0wcd I0 rcmn unchngcd I0r s0mcImc bcI0rc
ncw ncrcsc.
whcn usng Ihc 00rd0n's gr0wIh m0dcl, I my I Imcs bc ncccssry
I0 csImIc Ihc IuIurc gr0wIh rIc Ir0m dI n dvdcnds gr0wIh n
Ihc lsI Icw ycrs.
Thc crnngs nd dvdcnds 0I Abbcy Plc n Ihc lsI Ivc ycrs hvc
bccn s I0ll0ws:
N'000 N'000
2004 2,000 750
2005 2,550 9b0
200b 2,750 ,030
2007 3,250 ,225
2008 3,500 ,32
Thc c0mpny s n llcquIy c0mpny wIh 5m shrcs n ssuc, cch
wIh mrkcI prcc 0I N3.50 cxdv. EsImIc Ihc c0sI 0I 0rdnry shrc.
0vdcnds hvc g0nc up Ir0m N750,000 n 2004 I0 N,32,000 n
2008. Ths s 4 ycrs gr0wIh. Thc vcrgc gr0wIh rIc 'g' my bc
clculIcd s I0ll0ws.
0vdcnd n 2004 x (+g)
4
= 0vdcnd n 2008
Rcrrngng
( )
2004 n 0vdcnd
2008 n 0vdcnd
g
4
= +
000 , 750
000 , 32 ,
=
= .75
!+g =
4
75 .
g =
4
75 .

N
N
208
= .50
= 0.5
= 5
2b24 . 0
000 , 000 , 5
000 , 32 ,
Shrcs 0I . N0
) 2008 ( 0vdcnd
0
0
= = =
Thc prcv0us ycrs' vcrgc gr0wIh rIc s cxpccIcd by shrch0ldcrs I0
c0nInuc nI0 n ndcInIc IuIurc Imc. Thc c0sI 0I cquIy
c
K wll IhcrcI0rc
bc
g
P
0
0

+
whcrc 0

= 0
0
(+g)
= 0.2b24 x .5 = 0.308
=
5 . 0
50 . 3
308 . 0
+
= 0.08b23+0.5
=0.23b23
= 0.24=24
whcrc Ihcrc s ssuc c0sI, d|usImcnI hs I0 bc mdc I0 Ihc nvcsImcnI
pprsl pr0ccss. Thcrc rc Iw0 ppr0chcs:
() Add Ihc ssuc c0sI I0 Ihc nIl cpIl 0uIly 0I Ihc pr0|ccI. C0sI 0I
cpIl s n0I IIccIcd.
(b) ClculIc Ihc c0sI 0I ncw cquIy wIh Ihc I0rmul,
x P
d
K
0

=
whcrc x rcprcscnIs Ihc ssuc c0sI.
Thc ssuc prcc 0I shrc s N3.00. !ssuc c0sIs rc 5 k0b0 pcr shrc.
!I Ihc ncw shrch0ldcrs cxpccI c0nsInI nnul dvdcnd 0I 50k0b0
pcr nnum, whI s Ihc c0sI 0I Ihc ncw cquIy!
N
N
209
54 . 7
5 300
50
=

Thc c0sI 0I cquIy c0uld bc csImIcd drccIly usng Ihc CAPM ppr0ch.
CAPM cal cul at es t he requi red rat e of ret urn R
|
0n shrc, usng Ihc
I0ll0wng I0rmul.
( )
I m I |
R R R R | + =
whcrc R
|
s Ihc rcqurcd rcIurn 0I sccurIy |
R
I
s Ihc rskIrcc rIc,
R
m
s Ihc cxpccIcd rcIurn 0I Ihc mrkcI p0rII0l0
|
| s Ihc bcI c0cIIccnI 0I Ihc sccurIy
As dscusscd crlcr n Ihs sIudy pck, bcI s mcsurc 0I Ihc
sysIcmIc rsk 0I sccurIy's rcIurn nd bccusc nvcsI0rs rc rsk
vcrsc, Ihc grcIcr Ihc bcI 0I shrc Ihc grcIcr Is rcqurcd rcIurn.
Ths rskrcIurn rclI0nshp s sh0wn n Ihc b0vc cquI0n s kn0wn
s Ihc sccurIy mrkcI lnc (SML)
1SK Plc shrc hd bccn I0und I0 bc .25 rcIlccIng Ihc IcI IhI Is
cxccss rcIurn (rcIurn n cxccss 0I Ihc rsk Ircc rcIurn) vrcs m0rc Ihn
pr0p0rI0nIcly n rclI0n I0 Ihc cxccss rcIurn I0r Ihc mrkcI. Thc
drccI0rs bclcvc IhI Ihs rclI0nshp wll c0nInuc nI0 Ihc IuIurc. !I
Ihc mrkcI ndcx rcIurn s 5 nd Ihc rcIurn 0I Ircsury blls s 2,
clculIc Ihc c0sI 0I cquIy 0I 1SK Plc.
Usng Ihc b0vc CAPM I0rmul
R
|
= 0.2+.25 (0.50.2)
= 0.2 + .25 (0.03)
= 0.2 + 0.0375
= 0.575 0r 575
20
Ths s smplc spccdy buI nc0rrccI wy 0I csImIng Ihc c0sI 0I
cquIy. A rsk prcmum s ddcd I0 Ihc rskIrcc rIc I0 rcIlccI Ihc
sysIcmIc rsk 0I Ihc Irm I0 lcndcrs. Thc grcIcr Ihs prcmum, Ihc
grcIcr Ihc nIcrcsI IhI hs I0 bc pd by Ihc Irm. A IurIhcr prcmum
ddcd I0 Ikc crc 0I Ihc rclIvc hghcr sysIcmIc rsk 0I 0rdnry
shrcs.
Assumc, I0r cxmplc, IhI Ihc n0rml rsk prcmum cxpccIcd I0r
shrcs 0vcr dcbcnIurcs s b0uI b nd ssumc IurIhcr IhI Ihs
ppcrs 0ky I0r 1SK Plc. !I Ihc c0mpny's bcI0rcIx c0sI 0I Is
dcbcnIurc sI0ck s sy 0, Ihcn Is c0sI 0I cquIy wll bc csImIcd
s 0+b = b.
Thc c0sI 0I cquIy s n0rmlly uscd bccusc rcIncd crnngs rc
ls0 prI 0I cquIy.
Thc c0sIs 0I ndvdul c0mpny's s0urcc 0I cpIl hvc s0 Ir, bccn
c0nsdcrcd. Thc ppr0ch I0 clculIng Ihc wACC s cxplncd n Ihc
llusIrI0n b9 bcl0w.
Thc mngcmcnI 0I Elumdc Plc s plnnng n nvcsImcnI
pr0grmmc nd I nccds I0 dccdc 0n Ihc ppr0prIc c0sI 0I cpIl
I0r cvluIng nvcsImcnI pr0|ccIs. Thc c0mpny hs n ssuc mll0n
0rdnry shrcs 0I 50k cch wIh currcnI mrkcI prcc 0I 90 k0b0
pcr shrc cum dv. !I hs ls0, n ssuc, N500,000 5 rrcdccmblc
dcbcnIurcs wIh currcnI mrkcI vluc 0I N05 (pr vluc N00)
nd N300,000 prcIcrcncc shrcs currcnIly prccd I 80k0b0 pcr
shrc. Thc prcIcrcncc dvdcnd (ncI) hs |usI bccn pd buI Ihc
0rdnry dvdcnd nd dcbcnIurc nIcrcsI rc duc I0 bc pd n n0I
I00 dsInI IuIurc. Thc 0rdnry shrc dvdcnd wll bc N20,000 Ihs
ycr nd mngcmcnI hs mdc Is vcws kn0wn IhI crnngs nd
dvdcnds wll gr0w by b pcr nnum nI0 pcrpcIuIy.
Thc cxIrcI Ir0m Ihc c0mpny's blncc shccI s s I0ll0ws:
2
0rdnry shrc 0I N50 cch 500,000
b PrcIcrcncc Shrcs 300,000
0cbcnIurcs 500,000
Rcscrvcs 200,000
Advsc Ihc mngcmcnI 0I Elumdc Plc 0n Ihc c0sI 0I cpIl I0 usc
sIIng ny ssumpI0ns dccmcd ncccssry. Assumc c0mpny Ix 0I
30.
Thc c0sI 0I cpIl 0I Inncl sscI (sccurIy) s Ihc nIcrnl rIc 0I
rcIurn whch cquIcs Ihc P\s 0I Ihc cxpccIcd IuIurc csh Il0ws 0I Ihc
sscI wIh Is mrkcI prcc. Thc blncc shccI (b00k) vlucs 0I Ihc
sccurIcs nd rcscrvcs sh0uld bc gn0rcd.
()
=
( ) 30 . 0
5 05
5

=
( ) 70 . 0
90
5
|
.
|

\
|
= (0.bb7)(0.70) =0.b7 0r .b7
()
=
00 x
k0b0 80
k0b0
= 3.75
()
0vcn b pcr nnum ndcInIc c0nsInI gr0wIh rIc, Ihs c0sI
my bc csImIcd s I0ll0ws.
22
( )
30 . 22
223 . 0
0b . 0 b3 . 0
0b . 0
000 , 780
200 , 27
0b . 0
000 , 20 000 , 900
0b . 000 , 20 N
=
=
+ =
+ =
+

=
(v)
0cbcnIurcs 525,000 .b7 b,2b8
PrcI. shrcs 240,000 3.75 33,000
0rdnry shrc 780,000 22.30 73,940
* cx dv wACC =
000 , 545 ,
208 , 2b8
= 0.73b 0R 7.3b
(v) Thc mngcmcnI 0I Elumdc Plc my dccdc I0 dd rsk
prcmum 0I sy b I0 Ikc crc 0I rsk 0I Ihc pr0|ccI IsclI nd
Ihcn usc ppr0xmIcly 23 I0 cvluIc pr0|ccIs.
() Thc cpIl sIrucIurc (Inncng pr0p0rI0n) 0I Ihc c0mpny s
kn0wn nd Ihc c0mpny wll c0nInuc I0 Inncc ncw pr0|ccIs
n Ihs pr0p0rI0n.
() Thc c0sIs 0I Ihc ndvdul s0urccs, s c0mpuIcd, wll n0I chngc
n IuIurc.
() Thc rsk 0I Ihc pr0|ccI undcr c0nsdcrI0n s n0I dIIcrcnI Ir0m
Ihc vcrgc rsk 0I ll 0Ihcr pr0|ccIs undcrIkcn by Ihc c0mpny.
N
N
23
(v) Ncw pr0|ccIs rc Innccd by ncw Iunds I0 bc 0bIncd I0r Ihc
pr0|ccIs.
(v) Thc c0sI 0I cpIl uscd rcIlccIs Ihc mrgnl c0sI 0I ncw Iunds
I0 Inncc Ihc pr0|ccI.
Thc rcs0n IhI hd bccn dvnccd I0r Ihc usc 0I wACC s IhI
c0mpny wll bc blc I0 cnhncc Ihc mrkcI vluc 0I Ihc c0mpny
(nd IhcrcI0rc Ihc shrch0ldcrs' wclIh) by Inncng ncw
nvcsImcnIs n Ihc pr0p0rI0ns spccIcd nd cccpIng 0nly Ih0sc
pr0|ccIs IhI ycld m0rc Ihn wACC
Succcss Plc s Innccd by mx 0I cquIy nd dcbI. Thc cpIl
sIrucIurc hs lwys bccn cquIy (3/5) nd dcbI (2/5). Thc c0sI 0I
cquIy s 5 nd IhI 0I dcbI s 0. A ncw nvcsImcnI 0pp0rIunIy
hs |usI cmcrgcd. Thc pr0|ccI wll c0sI Nm nd pr0vdc rcIurn
bcI0rc nIcrcsI 0I N50,280 I0r n ndcInIc IuIurc pcr0d. Sh0uld
Ihc c0mpny cccpI Ihc pr0|ccI! !gn0rc Ix
wACC s clculIcd s I0ll0ws:
0 X
5
2
5 X
5
3
+ =
= 9 + 4
RcIurn bcI0rc nIcrcsI = 50,280
P\ IuIurc csh Il0ws s
3 . 0
280 , 50
NP\ = ,5b,000 ,000,000
Funds dccmcd I0 bc pr0vdcd by lcndcr =
5
2
x N m
= N400,000. !nIcrcsI 0n Ihs m0unI s N40,000
Am0unI vlblc I0 Ihc 0rdnry shrch0ldcrs s
N5b,000 N40,000 = Nb,000
Shrc 0I EquIy Inncc =
5
3
X Nm = Nb00,000
24
RcIurn I0 Ihc 0rdnry shrch0ldcrs
wll bc =
000 , b00
000 , b
Ths rcIurn cxcccds Ihc c0sI 0I cquIy 0I 5
Thc c0sI 0I cpIl 0I c0mpny s n vcrgc c0sI c0nccpI whcrc, s I s n
m0sI cscs, c0mpny s Innccd by mx 0I dcbI, cquIy nd 0Ihcr s0urccs
0I Inncc. !I s wcghIcd vcrgc, puIIng nI0 c0nsdcrI0n Ihc mp0rIncc
0I cch s0urcc 0I Inncc. Thc c0sI 0I cpIl s n0rmlly rcqurcd I0r Ihc
cvluI0n 0I nvcsImcnI pr0|ccIs 0I Ihc c0mpny. Thc c0mpny's c0sI 0I cpIl
musI bc l0wcr Ihn Ihc ycld 0n ncw pr0|ccI I IhI pr0|ccI s I0 bc cccpIblc.
AlIcrnIvcly, Ihc pr0|ccIs IuIurc csh Il0ws, dsc0unIcd I0 Ihcr prcscnI vlucs
usng Ihc Irm's c0sI 0I cpIl musI bc grcIcr Ihn Ihc prcscnI c0sI 0I Ihc
pr0|ccI.
Thc wACC cn 0nly bc c0mpuIcd IIcr clculIng Ihc c0sIs 0I ndvdul
s0urccs 0I Iunds. A c0mpny Innccs Is ncw pr0|ccI Ir0m p00l 0I Iunds. A
pr0|ccI cnn0I bc spccIclly dcnIIcd wIh prIculr s0urcc 0I Iunds,
hcncc Ihc usc 0I wACC. !I sh0uld bc n0Icd h0wcvcr, IhI Ihc usc 0I wACC cn
0nly bc |usIIcd undcr spccIcd ssumpI0ns, ncludng Ihc 0nc nv0lvng
Ihc c0nInung mnIcnncc 0I Ihc cxsIng cpIl sIrucIurc whcn rsng
ncw Iunds I0r ncw pr0|ccIs.
!n c0mpuIng Ihc c0sI 0I cquIy, n lIcrnIvc ppr0ch I0 usng Ihc 0vdcnd
vluI0n m0dcl s Ihc usc 0I CAPM. Thc CAPM dcrvcs Ihc c0sI 0I cquIy
cpIl Ir0m cpIl mrkcI nI0rmI0n. !I dcls cxplcIly wIh Ihc rsk 0I
sccurIy by clculIng rsk prcmum IhI s bscd 0n Ihc cxpccIcd cxccss
rcIurn dcIcrmncd by Ihc bcI 0I IhI sccurIy. wACC, lIh0ugh ls0 mrkcI
bscd, nc0rp0rIcs rsk nI0 Ihc c0sI 0I cpIl lcss I0rmlly Ihn CAPM,
Fnlly Ihc |usIIcI0n I0r usng wACC hngcs 0n Ihc IcI IhI wACC s Ihc
m0sI dcpcndblc gudc I0 Ihc ddI0nl c0sI 0I cxIr cpIl mdc vlblc
I0r Ihc Inncng 0I ncw pr0|ccIs 0I Ihc Irm, pr0vdcd Ihc b0vc ssumpI0ns
h0ld.
25
b.b.
. !n clculIng Ihc wcgIcd Avcrgc c0sI 0I cpIl (wACC) whI vluc
sh0uld bc uscd I0r Ihc c0mp0ncnIs 0I Ihc cpIl sIrucIurc!
A 00k vluc
00ng c0nccrn vluc
C 00ncc0nccrn vluc
0 MrkcI vluc
E !nIrnsc vluc
Usc Ihc I0ll0wng nI0rmI0n I0 nswcr qucsI0ns 2 nd 3.
A c0mpny's cquIy shrcs rc currcnIly Irdng I N4 cch 0n Ihc sI0ck mrkcI.
0vdcnd cxpccIcd I0 bc pd ncxI ycr s 28 k0b0 pcr shrc nd c0nsInI
gr0wIh rIc 0I 0 pcrccnI nI0 n ndcInIc IuIurc, s cxpccIcd. Thc c0mpny s
Innccd wh0lly by cquIy.
2. whI s Ihc c0sI 0I cquIy cpIl!
A 0
7
C 7.7
0 28
E 4
3. whI s Ihc wcghIcd vcrgc c0sI 0I cpIl (wACC) 0I Ihc c0mpny!
A 0
28
C 4
0 7.7
E 7
4. A c0mpny pys N40,000 pcr nnum nIcrcsI 0n rrcdccmblc dcbcnIurc
sI0ck wIh n0mnl vluc 0I N500,000 nd mrkcI vluc 0I N400,000,
Ihc c0mpny's Ix rIc s 30. whI s Ihc c0sI 0I dcbcnIurc!
A 5.b
0
C 8
0 7
E 3
2b
5. !n csImIng Ihc c0sI 0I cquIy cpIl whcrc dvdcnd s currcnI dvdcnd
s gnsI cxpccIcd dvdcnd, whI sh0uld bc Ihc 0

0I Ihc c0mp0ncnI 0I
Ihc I0rmul whcrc Ihc dvdcnd s cxpccIcd I0 gr0w I c0nsInI rIc!
A 0

+g
C 0
0
(+g)
0 0
0
+g
E g
b.b.2
. SIIc Ihc rclI0nshp bcIwccn Ihc rcqurcd rIc 0I rcIurn 0I shrch0ldcrs
nd Ihc c0sI 0I cquIy cpIl 0I c0mpny!
2. SIIc 0NE c0ndI0n undcrlyng Ihc usc 0I wcghIcd vcrgc c0sI 0I cpIl
(wACC) I0r c0mpny's nc0mng pr0|ccI.
3. whcrc dcbcnIurc sI0ck s rcdccmblc sy I Ihc cnd 0I Ihc IIIh ycr.
whI ppr0ch sh0uld bc uscd n clculIng Ihc c0sI 0I Ihc dcbcnIurc!
4. whcrc c0mpny's p0lcy s I0 rcIlccI Ihc ssuc c0sI 0I cquIy n Ihc c0sI
0I cquIy cpIl, h0w sh0uld Ihs c0sI bc IrcIcd!
5. whI s Ihc c0sI 0I sh0rIIcrm Iunds such s 0vcrdrIIs!
27
AIIcr sIudyng Ihs chpIcr, Ihc rcdcr sh0uld bc blc I0:
+ 0cInc nd undcrsInd cpIl sIrucIurc 0I Irm,
+ 0scuss Ihc vcws 0I Ihc IrdI0nl ppr0ch I0 Ihc mpcI 0I gcrng 0n Ihc
vluc 0I Ihc c0mpny,
+ 0scuss Ihc vcws 0I Ihc ncI 0pcrIng nc0mc ppr0ch,
+ 0scuss Ihc vcws 0I M0dgln nd Mllcr Ihc prcIx p0sI0n, nd
+ 0scuss Ihcr p0sIIx vcws.
CpIl sIrucIurc dccs0ns rc crIcl Inncng dccs0ns 0I c0mpny,
bccusc 0I Ihcr mplcI0ns I0r Ihc vluc 0I Ihc c0mpny. Sh0uld c0mpny
b0rr0w I ll! !I I dccdcs I0 b0rr0w, h0w much! Thc cIIccIs 0I Ihcsc dccs0ns
rc, up I0 n0w, n0I scIIlcd. Ths chpIcr wll pr0vdc Ihc ncccssry npuIs
IhI wll gudc Inncl mngcrs n Ihcr dccs0nmkng pr0ccss. Thc
IundmcnIl ssuc s whcIhcr c0mpny cn nIlucncc Is I0Il vluc Ihr0ugh
Is c0sI 0I cpIl by vryng Is cpIl sIrucIurc. Thc I0ll0wng ssumpI0ns
wll bc mdc:
() All crnngs rc dsIrbuIcd n I0rm 0I dvdcnds, Ihus gn0rng Ihc
cIIccI 0I dvdcnd p0lcy,
(b) Thcsc crnngs rc ssumcd I0 hvc zcr0 gr0wIh nI0 pcrpcIuIy,
(c) Thcrc s n0 chngc n Ihc nvcsImcnI dccs0ns 0I Ihc c0mpny,
(d) AlIh0ugh Ihc I0Il cpIlsI0n wll n0I chngc, Ihc gcrng 0I Ihc
c0mpny cn bc chngcd by ssung l0ngIcrm dcbI I0 rcpurchsc
shrcs 0r ssung shrcs I0 rcdccm l0ngIcrm dcbI, nd
(c) Tx s, I0r n0w, gn0rcd.
Thc cnsung Ihc0rcIcl dscuss0n wll Ihus ccnIrc 0n Ihc rclI0nshp bcIwccn
cpIl sIrucIurc (0nly dcbIcquIy Inncng ssumcd I0r smplcIy) nd
Ihc c0mpny's wcghIcd vcrgc c0sI 0I cpIl nd Ihc mpcI 0I Ihc vrI0n
0I Ihs rclI0nshp 0n Ihc vluc 0I Ihc c0mpny.
28
CpIl sIrucIurc, ls0 cllcd Inncl lcvcrgc 0r gcrng, s Ihc pr0p0rI0n
0I c0mpny's l0ngIcrm dcbI (nd prcIcrcncc shrcs I ny) I0 0rdnry
shrc cpIl. A c0mpny my, I0r cxmplc, hvc 30 dcbI nd 70 cquIy
0r 40 dcbI nd b0 cquIy mkng up Is cpIl sIrucIurc.
!n rclI0n I0 Ihc cIIccI 0I cpIl sIrucIurc 0n Ihc vluc 0I Ihc c0mpny,
Ihcrc rc Iw0 vcws Ihc 'IrdI0nl' vcw nd Ihc ncI 0pcrIng nc0mc
ppr0ch.
Thc vcw 0I Ihc IrdI0nlsI s IhI Ihcrc s n 0pIml cpIl sIrucIurc
nd IhI Ihc mngcmcnI dcbIcquIy dccs0ns cn bc mdc I0
chcvc Ihs 0pIml p0sI0n, Ihcrcby ncrcsng Ihc I0Il vluc 0I
Ihc c0mpny. Thc 0pIml cpIl sIrucIurc s IhI whch mnmzcs
Ihc c0mpny's c0sI 0I cpIl (symb0lscd s K
c
) nd mxmscs Ihc
I0Il vluc 0I Ihc c0mpny.
Thc I0ll0wng p0nIs rc dvnccd by Ihs Ihc0ry 0I cpIl sIrucIurc:
() As Ihc c0mpny ncrcscs Is gcrng lcvcl, Ihc c0sI 0I dcbI
(symb0lscd s K
d
) rcmns unchngcd. AIIcr ccrIn lcvcl,
(sgnIcnI lcvcl), h0wcvcr, Ihc Inncl rsk I0 Ihc lcndcrs
ncrcscs. Thcy Ihcn sk I0r hghcr rcIurn.
(2) Thc cquIy h0ldcrs I0r Ihc b0vc rcs0n, ls0 ncrcsc Ihc c0sI
0I cquIy (Ihcr rcqurcd rcIurn). AlIh0ugh Ihc c0sI 0I cquIy
(symb0lscd s K
c
) g0cs up, Ihc nIcrcsI rIc bcncIIs rc n0I
c0mplcIcly 0IIscI by Ihs ncrcsc. C0nscqucnIly, wACC wll sIll
bc I0ll0wng.
(3) H0wcvcr, s b0rr0wng ncrcscs, Ihc cquIy h0ldcrs wll
(bccusc 0I Ihc much ncrcscd rsk pcrccpI0n 0I Ihc c0mpny)
bc skng I0r m0rc rcIurns. Thcrc wll bc lcvcl whcn Ihc
rcqurcd cquIy rcIurns wll m0rc Ihn 0IIscI Ihc nIcrcsIIx
bcncIIs 0I b0rr0wng. AI Ihs lcvcl, wACC wll sIrI rsng. Ths
lcvcl s Ihc 0pIml cpIl sIrucIurc lcvcl.
(4) AI Ihc 0pIml lcvcl, Ihc vluc 0I Ihc c0mpny wll bc
mxmscd. Thc rcs0n s IhI I Ihs lcvcl Ihc l0wcsI
cpIlsI0n rIc K
0
s pplcd I0 Ihc ncI 0pcrIng csh Il0ws,
Ihc rcsulI s hghcsI prcscnI vluc 0I such csh Il0ws. Thc
IrdI0nlsI Ihus c0ncludcs IhI K
0
dcpcnds 0n gcrng 0I Ihc
c0mpny nd Ihcrc s n 0pIml cpIl sIrucIurc. Thc b0vc
vcw s dcm0nsIrIcd grphclly s I0ll0ws:
29
Kc
K0
Kd
C
0
s
I
0
I
c

Lcvcl 0I gcrng
K
c
s Ihc c0sI 0I cquIy
K
d
s Ihc c0sI 0I dcbI
K
0
s Ihc wcghIcd vcrgc c0sI 0I cpIl
0
p
s Ihc 0pIml gcrng lcvcl
A Plc hs N500,000 0I dcbI wIh c0up0n rIc 0I 0 nd mrkcI vluc
whch s I pr wIh Ihc mnml vluc 0I Ihc dcbI. Thcrc rc 250,000 shrcs
n ssuc. Thc c0sI 0I cquIy s 5 whlc Ihc c0mpny crns N500,000 pcr
nnum bcI0rc nIcrcsI. Assumc Ihc c0mpny ssucs N480,000 0I dcbI cpIl
(ls0 I pr) I 0 I0 buy bck 40,000 shrcs lcvng 20,000 shrcs n
ssuc. Assumc IurIhcr IhI bccusc 0I ncrcscd gcrng lcvcl nd Ihc
IIcndnI ncrcscd Inncl rsk, Ihc c0sI 0I cquIy ncrcscd I0 7.
ClculIc Ihc wACC nd mrkcI vluc 0I 0rdnry shrc b0Ih bcI0rc nd IIcr
chngc n cpIl sIrucIurc nd cxpln Ihc cIIccI 0I chngc n cpIl
sIrucIurc.
N
() cI0rc chngc n gcrng
Ernngs pcr nnum 500,000
Lcss: !nIcrcsI (0 0I N500,000) (50,000)
Ernngs vlblc I0 Ihc
0rdnry Shrch0ldcr 450,000
C0sI 0I cquIy 5
MrkcI \luc 0I EquIy N450,000 0.5
=N3,000,000
Add mrkcI \luc 0I dcbI 500,000
MrkcI \luc 0I Ihc c0mpny N
220
Thc wACC s
000 , 500 , 3
000 , 500
x 00
= 4.29
MrkcI \luc 0I
cch 0rdnry shrc =
000 , 250
000 , 000 , 3
= N2.00
N
(b)
Ernngs pcr nnum 500,000
Lcss nIcrcsI (0 0I N980,000) (98,000)
Ernngs vlblc I0 Ihc
0rdnry Shrch0ldcr 402,000
0.7
MrkcI \luc 0I EquIy =N2,3b4,70b
Add mrkcI \luc 0I dcbI 980,000
MrkcI \luc 0I Ihc c0mpny N3,344.70b
Thc wACC s =
70b , 344 , 3
000 , 500
x 00
MrkcI \luc 0I
cch 0rdnry shrc =
000 , 20
70b , 3b4 , 2
=N.2b
Thc ncrcsc n Ihc pr0p0rI0n 0I dcbI I0 cquIy Ir0m b0uI 7 I0
b0uI 44.44 hs ncrcscd wACC (duc I0 ncrcsc n Ihc c0sI 0I cquIy)
nd Ihc mrkcI vlucs 0I b0Ih Ihc c0mpny nd cch shrc hvc
dr0ppcd.
Ths s Ihc0ry 0I cpIl sIrucIurc whcrcby Ihc wcghIcd Avcrgc
C0sI 0I CpIl (wACC) nd Ihc I0Il vluc 0I Ihc c0mpny rcmn Ihc
smc rcgrdlcss 0I Ihc lcvcl 0I gcrng. !n Ihs csc Ihc ncI 0pcrIng
nc0mc 0I Ihc c0mpny s cpIlzcd by wACC (K
0
) I0 0bIn Ihc I0Il
vluc 0I Ihc c0mpny. Thc mrkcI vluc 0I Ihc dcbI s Ihcn dcducIcd
Ir0m Ihs I0Il vluc I0 gcI Ihc vluc 0I Ihc c0mpny's cquIy.
N
N
N
N
N
N
22
Usng Ihc nI0rmI0n n llusIrI0n 7 nd ssumng wACC 0I 20
pcr ccnI. Thc I0ll0wng sIuI0n wll 0bIn:
N
Ernngs 500,000
wACC 0.20
MrkcI \luc 0I Ihc C0mpny =
2 . 0
000 , 500
=N2,500,000
mrkcI vluc 0I Ihc dcbI N 500,000
MrkcI \luc 0I cquIy N2,000,000
Thc c0sI 0I cquIy s IhcrcI0rc N500,000/N2,000,000 whch s cqul
I0 25 nd Ihc mrkcI vluc 0I cquIy pcr shrc s N2,000,000/250,000
= N8.00
Supp0sc, gn, IhI Ihc gcrng lcvcl s ncrcscd by ssung
N500,000 ddI0nl dcbI I 0 I0 buy bck b2,500 0rdnry shrcs
I mrkcI vluc 0I N8 pcr shrc. Lcvng 87,500 shrcs n ssuc.
Thc I0ll0wng p0sI0n wll h0ld:
N
Ernngs pcr nnum 500,000
wACC 0.20
MrkcI \luc 0I Ihc C0mpny = 2,500,000
MrkcI \luc 0I dcbI ,000,000
MrkcI \luc 0I EquIy
C0sI 0I cquIy =
000 , 500 ,
) 000 , 000 , 0I 0 ( 000 , 500
=N
b7 . 2b
000 , 500 ,
000 , 400
=
MrkcI vluc 0I cquIy =N
b7 . 2b
500 , 87
000 , 500 ,
=
=
N
N
N
N
222
Kc
K0
Kd
C
0
s
I
0
I
c

Lcvcl 0I gcrng
Thc N0! ppr0ch sys IhI Ihc lcvcl 0I gcrng (chngcs n dcbI/
cquIy rI0) d0cs n0I IIccI Ihc I0Il vluc 0I Ihc c0mpny 0r Ihc mrkcI
vluc 0I Ihc ndvdul shrc. !nvcsI0rs rc n0I b0Ihcrcd s I0 h0w Ihc
c0mpny Innccs Is 0pcrI0ns s Ihs d0cs n0I IIccI Ihcm cIhcr n
I0Il 0r s ndvduls. Thc rcs0nng bchnd Ihs p0sI0n, s IhI, s
Ihc lcvcl 0I gcrng ncrcscs, Ihc c0sI 0I cquIy ls0 ncrcscs.
H0wcvcr, Ihc ncrcsc n Ihc c0sI 0I cquIy s such IhI I d0cs n0I
0uIwcgh Ihc Ixshcld bcncIIs, n IcI Ihcy rc cxcIly 0IIscI by cch
0Ihcr, hcncc Ihcrc s c0nsInI lcvcl 0I wACC (K
0
) s gcrng chngcs.
M0dgln nd Mllcr (M & M) n Ihcr 0rgnl vcrs0n br0ughI n
'bchv0url' IcI0r I0 supp0rI Ihc N0! ppr0ch 0n Ihc bscncc 0I
ny rclI0nshp bcIwccn I0Il vluc 0I Ihc c0mpny 0r Is c0sI 0I
cpIl nd Is lcvcl 0I gcrng. M & M's bclcI s IhI Ihc I0Il vluc
0I Ihc c0mpny dcpcnds 0n Ihc IuIurc crnngs sIrcm 0I Ihc c0mpny
nd Ihc rsk 0I Ih0sc crnngs nd n0I 0n Ihc wy Ihc c0mpny s
Innccd. Thus, Ihc dsc0unI rIc uscd n cvluIng ny nvcsImcnI
pr0|ccI hs n0 rclI0nshp whIs0cvcr wIh Ihc mcIh0d 0I Inncng
Ihc pr0|ccI. M&M mdc Ihc I0ll0wng ssumpI0ns whch rc w0rIh
mcnI0nng:
() PcrIccI cpIl mrkcIs whcrc Ihcrc rc IrnscI0n c0sIs,
nI0rmI0n s pcrIccI nd nvcsI0rs' bchv0ur s rI0nl,
(b) Thc cpIl mrkcI hs smlr cxpccII0ns vsvs Ihc IuIurc
crnngs 0I Ihc c0mpny, whch rc ssumcd I0 Ihc prcscnI
crnngs,
223
(c) !nvcsI0rs' vcws b0uI Ihc rsk 0I c0mpncs n Ihc smc rsk
clss rc Ihc smc, nd
(d) Abscncc 0I IxI0n (nIl p0sI0n).
M&M br0ughI n Ihcr bchv0url supp0rI IcI0r v Ihc c0nccpI 0I
rbIrgc.
!n Ihc c0nIcxI 0I Ihc Ihc0ry 0I cpIl sIrucIurc nd vluc, rbIrgc
mcns IhI shrcs (nd dcbcnIurcs) 0I dcnIcl c0mpncs (dcnIcl
n ll rcspccIs cxccpI n Ihcr cpIl sIrucIurcs) rc bcng s0ld I
dIIcrcnI prccs nd nvcsI0rs wll scll Ihc hghprccd shrcs nd
smulInc0usly buy Ihc l0wprccd 0ncs wIh vcw I0 mkng sh0rI
Icrm pr0II.
Thc llusIrI0n bcl0w wll cxpln h0w I 0pcrIcs:
C0nsdcr Iw0 c0mpncs, AE Plc nd 0E Plc n Ihc smc rsk clss,
whch rc dcnIcl n ll rcspccIs cxccpI IhI AE Plc s n llcquIy
c0mpny whlc 0E s dcbIcquIy c0mpny (lcvcrcd). 0E's cpIl
sIrucIurc ncludcs 8 N2m dcbI whch s ls0 Is mrkcI vluc. Thc
crnngs bcI0rc Ix 0I b0Ih c0mpncs rc Ihc smc I Nm pcr
nnum.
Assumc Ihc c0sI 0I cquIy n Ihc llcquIy (unlcvcrcd) c0mpny s
20 nd Ihc c0sI 0I cquIy n Ihc dcbIcquIy (lcvcrcd) c0mpny s
2. whI w0uld bc Ihc p0sI0n 0I Ihc:
() TrdI0nl vcw
() M&M vcw
Rcgrdng Ihc vlucs 0I b0Ih AE Plc nd 0E Plc !
Thc IrdI0nl vcw
Ernngs pcr nnum ,000,000 ,000,000
Lcss nIcrcsI (8 0I N2m) b0,000
Ernng bcl0ngng I0 EquIy ,000,000 840,000
C0sI 0I EquIy (0.20) (0.2)
MrkcI \luc 0I EquIy 5,000,000 4,000,000
224
MrkcI \luc 0I 0cbI 2,000,000
T0Il MrkcI \luc 0I Ihc C0mpny 5,000,000 b,000,000
wcghIcd vcrgc c0sI 0I cpIl 20 b.b7
0cbI/EquIy rI0 0 33

/
3

Thc Iw0 c0mpncs rc ssumcd, by Ihc IrdI0nl vcw I0 hvc dIIcrcnI

mrkcI vlucs.
Thc rgumcnI 0I M&M, h0wcvcr, s IhI Ihs sIuI0n s n0I susInblc
bccusc shrch0ldcrs n 0E Plc, Ihc lcvcrcd c0mpny, w0uld s00n dsc0vcr
IhI Ihcy c0uld crn hghcr rcIurn by scllng Ihcr nIcrcsIs, rcplcIng Ihc
gcrng, IhI s, c0nvcrIng c0rp0rIc gcrng wIh hs 0wn pcrs0nl gcrng
nd nvcsIng Ihc cnIrc sum n AL Plc Ihc unlcvcrcd c0mpny. Thcy rc, I
Ihcy d0 Ihc b0vc, crryng 0uI rbIrgc IrnscI0ns. Thc slc 0I Ihc shrcs
0I 0E Plc nd Ihc purchsc 0I Ihc shrcs 0I AE Plc wll:
() L0wcr Ihc prcc 0I 0E Plc shrcs Ihcrcby rsng Is c0sI 0I cquIy
cpIl, nd
(b) Rsc Ihc prcc 0I AL Plc Ihcrcby l0wcrng Is c0sI 0I cquIy cpIl.
UnIl Ihc I0Il mrkcI vluc 0I cch c0mpny s Ihc smc, whcn rbIrgc
cIvIy w0uld Ihcn cnd.
Assumng, I0r cxmplc, Mr. 1c0b 0wns 5 0I Ihc cquIy 0I 0E Plc, Ihc
I0ll0wng rbIrgc cIvIy sIcps wll 0ccur:
() Hc w0uld scll hs 5 sIkc n 0E Plc m0unIng I0 N200,000, IhI s
5 0I N4m
(b) RcplcIc Ihc c0rp0rIc gcrng 0I Ihc c0mpny wIh hs 0wn pcrs0nl
gcrng by b0rr0wng N00,000 (5 0I N2m) I 8.
(c) Add Ihs I0 Ihc pr0cccds 0I slc 0I Ihc shrcs (IhI s N200,000 +
N00,000) nd nvcsI Ihc I0Il n AE Plc s0 s I0 sccurc b nIcrcsI n
Is cquIy cpIl.
Hs p0sI0n w0uld n0w bc s I0ll0ws:
N
!nc0mc b 0I N mll0n b0,000
Lcss !nIcrcsI 0n N00,000 @ 8 8,000
NcI !nc0mc
N
NcI !nc0mc bcI0rc rbIrgc: 5 N840,000 42,000
225
Mr. 1c0b w0uld bc crnng N0,000 m0rc Ihn hs currcnI crnngs Ir0m
hs nvcsImcnI n 0E Plc
() Mr. 1c0b c0uld usc prI 0I Ihc N300,000 I0 cqurc 5 nIcrcsI n AE
Plc IhI s 5 0I N5m whch s cqul I0 N250,000.
(b) Hc w0uld bc cnIIlcd I0 5 0I Nm crnngs 0I AE Plc whch s cqul
I0 N50,000
Lcss: !nIcrcsI 0n l0n 8,000
NcI !nc0mc 42,000
(c) Hc w0uld hvc mnIncd hs crnngs nd I Ihc smc Imc hvc
n cc0unI 0I N50,000 I0r 0Ihcr nvcsImcnIs.
M&M rgucd IhI rI0nl nvcsI0rs wll g0 0n subsIIuIng c0rp0rIc
Inncl lcvcrgc wIh pcrs0nl Inncl lcvcrgc, scllng shrcs 0I
0E Plc nd buyng Ih0sc 0I AE Plc unIl Ihc prcc 0I Ihc I0rmcr hs
dr0ppcd nd Ihc prcc 0I Ihc lIIcr hs rscn, such IhI Ihcrc s n
cqulbrum p0nI. AI Ihs p0nI, Ihc c0sI 0I cquIy n Ihc c0mpny n
0E Plc, wll bc hghcr Ihn Ihc c0sI 0I cquIy n AE Plc.
(d) Thc wcghIcd vcrgc c0sI 0I cpIl n Ihc Iw0 c0mpncs w0uld bc
Ihc smc bccusc b0Ih Ihcr mrkcI vlucs nd Ihcr crnngs I0gcIhcr
wIh Ihc ss0cIcd rsks wcrc ls0 Ihc smc.
() Pcrs0nl Inncl lcvcrgc mghI n0I bc cxcIly subsIIuIblc I0r
c0rp0rIc gcrng s Ihcr rsks I0 Ihc nvcsI0r mghI bc dIIcrcnI.
(b) Als0, Ihc nIcrcsI c0sIs mghI bc dIIcrcnI.
(c) Thc cxsIcncc 0I IrnscI0n c0sIs my lmI Ihc rbIrgc 0pcrI0ns.
(d) TxI0n cnn0I bc cxcmpIcd n sccurIy IrnscI0ns.
(c) 0IIculIy n gcIIng c0mpncs wIh dcnIcl 0pcrIng chrcIcrsIcs.
whcn Ix s ll0wcd, Ihc c0nscnsus 0I m0sI Inncl cxpcrIs s IhI
Ihc sIuIc usc 0I dcbI n c0mpny's cpIl sIrucIurc mghI hvc
p0sIvc cIIccI 0n vluc. !n vcw 0I Ihc Ix dcducIblIy 0I nIcrcsI, Ihc
22b
ggrcgIc m0unI vlblc I0r b0Ih lcndcrs nd shrch0ldcrs wll
bc grcIcr n lcvcrgcd c0mpny.
Usng Ihc cxmplc 0I AE Plc nd 0E Plc, nd ssumng c0mpny Ix
rIc 0I 30, Ihc MM P0sIIx vcw cn bc sh0wn s I0ll0ws:
AE Plc 0E Plc
N N
Ernngs pcr nnum ,000,000 ,000,000
Lcss nIcrcsI (8 0I N2m) b0,000
Ernng bcI0rc Ix ,000,000 840,000
Tx I 30 300,000 252,000
Ernngs IIcr Ix 700,000 588,000
Ernngs vlblc I0r ll nvcsI0rs
(lcndcrs nd shrch0ldcrs) 700,000 748,000*
*N588,000 + Nb0,000
Thc I0Il crnngs vlblc I0 ll nvcsI0rs s grcIcr n Ihc lcvcrcd
c0mpny by n m0unI cqul I0 Ihc nIcrcsI Imcs Ihc Ix rIc IhI s
Nb0,000 x 0.30 whch s cqul I0 N48,000. Ths s Ihc Ixshcld
bcncIIs whch ccruc I0 Ihc lcvcrcd c0mpny. Assumng Ihc dcbI uscd
s rrcdccmblc, Ihc prcscnI vluc 0I nnul Ixshcld bcncIIs wll
bc s I0ll0ws:
P\ 0I Ix shcld bcncIIs =
( ) ( ) ( )

K
) Ic )( 0 ( Ic C
whcrc K s Ihc mrkcI nIcrcsI rIc (0r ycld) 0I Ihc dcbI nd s
ssumcd I0 bc cqul I0 Ihc c0up0n rIc. C nd Ic Ihc c0mpny Ix
rIc. F0r c0mpny 0E Plc P\ 0I Ixshcld bcncIIs wll bc cqul I0
Nb00,000 (N2 m x 0.30). M & M c0nIcndcd IhI Ihc Ixshcld bcncIIs
hvc vluc whch g0cs I0 ncrcsc Ihc mrkcI vluc 0I Ihc lcvcrcd
c0mpny by Ihc m0unI 0I Ihs Ixshcld bcncIIs. Thc ddI0nl
vluc I0r 0E Plc 0ccurs bccusc ll nvcsI0rs n Ihs c0mpny w0uld
bc rcccvng cvcry ycr N48,000 m0rc Ihn whcn Ihcrc s n0 dcbI.
Thc prcscnI vluc 0I N48,000/0.08 = Nb00,000. !I s ssumcd IhI
b0Ih Ihc nIcrcsI Il0ws nd Ihc rclIcd Ixshcld bcncIIs hvc Ihc
smc lcvcl 0I rsk, hcncc Ihc usc 0I Ihc smc dsc0unI rIc. Thc b0vc
cn bc sh0wn by Ihc I0rmul:
227
\
L
= \
u
+ 0
Ic
whcrc:
s Ihc vluc 0I Ihc lcvcrcd c0mpny
s Ihc vluc 0I Ihc unlcvcrcd c0mpny
s Ihc vluc 0I Ihc 0cbI
s Ihc c0mpny's Ix rIc.
0vcn Ihc c0sI 0I cquIy 0I 20 I0r AE Plc whch hs n0 dcbI, Is mrkcI
vluc wll bc N700,000/0.20 whch s cqul I0 N3.5m. Thc vluc 0I
Ihc Ixshcld bcncIIs s Nb00,000. Thc I0Il vluc 0I 0E Plc Ihc lcvcrcd
c0mpny s N3.5m + N0.bm whch s cqul I0 N4.m.
!I wll bc 0bscrvcd Ir0m Ihc b0vc cquI0n 0I IhI Ihc grcIcr Ihc
Ixshcld bcncIIs, Ihc grcIcr Ihc vluc 0I Ihc c0mpny ll Ihngs
bcng cqul. !n Ihc smc vcn, Ihc grcIcr Ihc lcvcl 0I gcrng, Ihc
l0wcr Ihc 0vcrll c0sI 0I cpIl. MM, Ihus, lIcrcd Ihcr 0rgnl vcw
by IcI0rng n c0mpny Ix. Thc vcw mplcs IhI c0mpncs sh0uld
c0nInuc I0 b0rr0w bccusc cc0rdng I0 Ihcm Ihcrc s n 0pImum
lcvcl 0I gcrng nd Ihs 0ccurs I lcvcl 0I ncr 00 dcbI Inncng.
Ths sIuI0n s, h0wcvcr, n0I n lnc wIh Ihc prcIcl b0rr0wng
bchv0ur 0I c0mpncs n Ihc cpIl mrkcIs, IhI s Inncng
c0mpny's 0pcrI0ns wIh lm0sI 00 dcbI.
Lcvcl 0I 0crng
C
0
s
I

0
I

C

228
CpIl sIrucIurc sh0ws Ihc rclI0nshp 0I dcbI I0 cquIy. Thc mplcI0n 0I
Ihs rclI0nshp I0r Ihc vluc 0I Ihc c0mpny s 0I grcI c0nccrn I0r Ihc
Inncl mngcrs. Thcrc rc Iw0 lIcrnIvc vcws Ihc IrdI0nl vcw
nd Ihc M&M (prcIx) vcw. Thc IrdI0nl vcw whch cmphszcs Ihc NcI
!nc0mc (N!) ppr0ch sh0wcd IhI Ihc m0unI 0I dcbI n Ihc cpIl sIrucIurc
IIccIs Ihc vluc 0I Ihc c0mpny. Thc vcw 0pncd IhI Ihc grcIcr Ihc lcvcl
0I gcrng Ihc l0wcr Ihc wACC bccusc 0I Ihc mpcI 0I Ihc Ix dcducIblIy
0I nIcrcsIs. H0wcvcr IIcr rcchng b0rr0wng lcvcl, Ihc wACC c0nInucs
I0 rsc. !I s I Ihs p0nI IhI wACC s mnmzcd nd I0Il vluc 0I Ihc
c0mpny mxmscd.
An0Ihcr ppr0ch Ihc NcI 0pcrIng !nc0mc (N0!) ppr0ch bclcvcd IhI
Ihcrc s n0 rclI0nshp bcIwccn Ihc lcvcl 0I gcrng nd Ihc vluc 0I Ihc
Irm. Ths vcw sIIcd IhI Ihc vrblcs IhI nIlucncc Ihc vluc 0I Ihc
c0mpny rc Ihc IuIurc crnngs 0I IhI c0mpny nd Ihcr rclIcd rsks s
gnsI Ihc wy Ihc 0pcrI0ns rc Innccd.
MM cmc up wIh sIr0ng dcIcnsc I0r Ihs lIIcr vcw nd bckcd I up wIh
bchv0url IcI0r. Ths IcI0r hngcs 0n Ihc p0ssblIy 0I rbIrgc
IrnscI0n by Ihc shrch0ldcrs. MM gvc Ihcr vcw undcr ccrIn
ssumpI0ns. Thcsc ssumpI0ns, whch ncludc bscncc 0I IxI0n, musI
bc n0Icd. M&M lIcr br0ughI n Ix I0 sscrI IhI, bccusc 0I Ix dcducIblIy
0I nIcrcsIs, Ihc Ixshcld bcncIIs hvc vluc. As Ir s M&M (P0sIIx)
vcw s c0nccrncd, Ihc vluc 0I Ihc gcrcd Irm wll bc grcIcr Ihn Ihc vluc
0I Ihc ungcrcd c0mpny by Ihc m0unI 0I Ihc prcscnI vluc 0I Ihc Ix
shcld bcncIIs. Thc grcIcr Ihc dcbI c0mpny Ikcs 0n, Ihc grcIcr Ihc Ix
shcld bcncIIs nd IhcrcI0rc Ihc grcIcr Ihc vluc 0I Ihc gcrcd c0mpny
whcn c0mprcd wIh Ihc ungcrcd c0mpny. Ths vcw mplcs IhI
c0mpny cn Ikc 0n lm0sI 00 dcbI Inncng, sIuI0n whch s n0I n
Iunc wIh c0rp0rIc Inncng bchv0ur.
7.4.
. whch 0NE 0I Ihc I0ll0wng s N0T n dvnIgc 0I dcbI Inncc 0vcr
cquIy Inncc n Ihc smc c0mpny!
A Tx dcducIblIy 0I nIcrcsI
L0wcr rcqurcd rcIurn 0n cpIl
C L0wcr rsk
0 Escr rcdcmpI0n 0I cpIl
E L0wcr ssuncc c0sI.
229
2. Acc0rdng I0 M0dgln nd Mllcr (M & M 0rgnl vcrs0n) whI s Ihc
cIIccI 0I gcrng ncrcsc 0n Ihc c0sI 0I cpIl! C0sI 0I cpIl:
A ncrcscs
rcduccs
C ncrcscs nd lIcr rcduccs
0 rcmns unchngcd
E rcduccs nd lIcr ncrcscs.
3. Acc0rdng I0 ncI nc0mc ppr0ch I0 cpIl sIrucIurc, whI s Ihc mpcI
0I ncrcsng dcbI cquIy rI0 0n Ihc mrkcI vluc 0I Ihc Irm! MrkcI
\luc:
A ncrcscs nd lIcr dccrcscs
rcmns Ihc smc
C dccrcscs nd lIcr ncrcscs
0 dccrcscs nd lIcr rcduccs
E ncrcscs nd lIcr ncrcscs.
4. Abscncc 0I bnkrupcy c0sIs s 0nc 0I Ihc ssumpI0ns undcrlyng M & M
(0rgnl vcrs0n). whI s Ihc mpcI 0I Ihc cxsIcncc 0I bnkrupcy c0sIs
0n Ihc mrkcI vluc 0I Ihc Irm s gcrng ncrcscs cc0rdng I0 M & M
(lIcr vcrs0n) Ihc0ry! MrkcI vluc s cxpccIcd I0:
A ncrcsc I c0nsInI rIc
ncrcsc I n ncrcsng rIc
C rcducc I c0nsInI rIc.
0 dccrcsc I n ncrcsng rIc
E dccrcsc I dccrcsng rIc
5. Acc0rdng I0 M & M Ihc0ry (p0sI Ix vcrs0n) whI s Ihc dIIcrcncc
bcIwccn Ihc vluc 0I unlcvcrcd Irm nd lcvcrcd Irm n rclI0n I0
c0rp0rIc Ixcs!
A Thc c0up0n rIc 0I Ihc dcbI
Thc mrkcI nIcrcsI rIc 0I Ihc dcbI
C Thc Ix rIc 0I Ihc nIcrcsI
0 Thc Ix rIc 0I Ihc dcbI
E Thc prncpl m0unI 0I Ihc dcbI.
7.4.2
. whI s Ihc IrdI0nl vcw 0n Ihc 0vcrll c0sI 0I cpIl s gcrng
ncrcscs!
2. SIIc Ihc kcy prncplc nv0lvcd n Ihc I0Il vluc ppr0ch I0 cpIl
sIrucIurc.
3. !nvcsI0rs n dcbI Inncc rcqurc l0wcr rcIurn Ihn 0rdnry
shrch0ldcrs, bccusc dcbI Inncc p0sscsscs ___________ rsk.
4. whI s IhI nIngblc sscIs IcI0r IhI mghI IIccI c0mpny's blIy
I0 b0rr0w!
5. A gcrcd c0mpny hs n ssuc N500,000 rrcdccmblc dcbI Inncc nd
N2m cquIy Inncc. C0up0n rIc 0I 5 s Ihc smc s mrkcI nIcrcsI
rIc. Thc c0mpny's Ix rIc s 30. whI s Ihc prcscnI vluc 0I Ihc Ix
shcld bcncIIs 0I Ihc dcbI!
23
AIIcr sIudyng Ihs chpIcr, Ihc rcdcr sh0uld bc blc I0:
+ UndcrsInd Ihc mcnng 0I c0mpny's dvdcnd p0lcy,
+ Expln Ihc dIIcrcnccs bcIwccn pssvc nd cIvc dvdcnd p0lccs,
+ Advncc Ihc0rcIcl rcs0nng I0r Ihc rclcvncc 0r rrclcvncc 0I dvdcnd
pymcnI I0 Ihc vluc 0I Ihc Irm,
+ 0scuss Ihc prcIcl IcI0rs IhI nIlucncc c0mpny's dvdcnd p0lcy
+ Expln Ihc mpcI 0I sIblIy 0I dvdcnds 0n Ihc vluc 0I shrc,
+ McnI0n Ihc dsdvnIgcs 0I sIblc nr dvdcnd pymcnI nd Ih0sc 0I sIblc
dvdcnd py0uI rI0, nd
+ Expln 0Ihcr spccIs 0I dvdcnd dccs0ns such s csh dvdcnds, scrp
dvdcnds, scrp ssucs, shrc splI, shrc c0ns0ldI0n nd shrc rcpurchsc.
0vdcnds rc pymcnIs by Ihc c0mpny I0 Ih0sc wh0 pr0vdc I wIh cquIy
Inncc Ihc shrch0ldcrs. Fr0m Ihc vcwp0nI 0I Ihcsc shrch0ldcrs,
dvdcnds rcprcscnI c0mpcnsI0n I0r p0sIp0nng c0nsumpI0n. Thc dvdcnd
p0lcy 0I Ihc Irm rclIcs I0 vr0us dccs0ns 0n pymcnIs 0I dvdcnd. Thc
Irm rcgrds dvdcnd dccs0n s m|0r spccI 0I Ihc Inncng dccs0n 0I
Ihc Irm. Thc crIcl qucsI0n Ihcn s whcIhcr pr0IIs sh0uld bc dsIrbuIcd
s dvdcnds 0r rcIncd wIhn Ihc Irm I0 Inncc IuIurc cxpns0n nd
gr0wIh. whI wll bc Ihc cIIccI 0I cIhcr dccs0n 0n Ihc vluc 0I Ihc Irm! !I
Ihc c0mpny dccdcs I0 py dvdcnds, h0w much sh0uld bc pd nd h0w
much sh0uld bc rcIncd! !I Ihcrc rc nvcsImcnI 0pp0rIunIcs, sh0uld Ihc
Irm usc Ihc m0ncs vlblc I0r dvdcnd I0 Inncc Ihcsc nvcsImcnIs 0r
sh0uld I py dvdcnds nd b0rr0w lIcr I0 Inncc Ihc nvcsImcnI
0pp0rIunIcs! Sh0uld Ihc c0mpny I0ll0w p0lcy 0I Ixcd Nr m0unI
pcr shrc pcr nnum 0r Ixcd pcrccnI 0I crnngs pcr nnum. All Ihcsc
qucsI0ns rcqurc nswcrs. Thc s0luI0ns nd 0Ihcr spccIs 0I dvdcnds
dccs0ns ncludng IcI0rs nIlucncng pymcnI 0I dvdcnds wll I0rm Ihc
sub|ccI mIIcr 0I Ihs chpIcr.
232
whcn c0mpny I0ll0ws pssvc dvdcnd p0lcy, I mcns I s IrcIng
dvdcnd pymcnI s rcsdul. Ths mcns IhI Ihc dcIcrmnng IcI0r s
rcgrds pymcnI 0I dvdcnd nd h0w much I0 py s Ihc vlblIy 0I
pr0IIblc nvcsImcnI pr0|ccIs. Thcsc rc pr0|ccIs wIh p0sIvc NP\. Thc dc
s IhI s l0ng s Ihc c0mpny hs pr0|ccIs wh0sc rcIurns rc n cxccss 0I (0r
I lcsI cqul I0) Ihc rcqurcd rcIurns, I sh0uld c0nInuc I0 Inncc Ihcsc
pr0|ccIs nd py 0uI n0Ihng s csh dvdcnds.
!I, h0wcvcr, Ihc c0mpny hs n0 snglc pr0IIblc nvcsImcnI, I cn py 00
pcrccnI 0I Ihc pr0IIs vlblc I0r dsIrbuI0n s csh dvdcnds. Ths mplcs
IhI n bcIwccn zcr0 pcrccnI nd 00 pcrccnI Ihcrc wll bc vr0us dvdcnd
py0uI rI0s wh0sc vlucs wll dcpcnd 0n vlblIy 0I pr0IIblc pr0|ccIs.
0n Ihc 0Ihcr hnd, Ihc cIvc dvdcnd p0lcy rcgrds dvdcnd pymcnI s
crIcl IcI0r n Ihc dcIcrmnI0n 0I Ihc vluc 0I Ihc Irm nd hcncc, Ihc
wclIh 0I Is shrch0ldcrs. Ths p0lcy IrcIs dvdcnd pymcnI n0I |usI s
wy 0I shrng pr0IIs, I ls0 l00ks I rcIcnI0ns s rcsduc. Thc qucsI0n
IhI rcdly c0mcs I0 mnd whcn cxmnng Ihcsc Iw0 p0lccs, s: rc
dvdcnd pymcnIs rclly rclcvnI I0 Ihc wclIh 0I Ihc shrch0ldcrs 0r rc
Ihcy rrclcvnI! Thc dscuss0n bcl0w wll I0cus 0n Ihc Ihc0rcIcl rgumcnIs
puI I0rwrd by M0dgln & Mllcr (M & M) sh0wng Ihc rrclcvncc 0I
dvdcnds I0 Ihc wclIh 0I Ihc shrch0ldcrs.
M0dgln nd Mllcr (M & M) sIr0ngly rgucd 0n h0w Ihc vluc 0I Ihc Irm
(nd IhcrcI0rc Ihc wclIh 0I Is shrch0ldcrs) s unIIccIcd by Ihc wy
vlblc pr0IIs rc shrcd bcIwccn rcIcnI0ns nd dvdcnd py0uI. Thcy
bclcvc IhI Ihc vluc 0I Ihc Irm s dcIcrmncd by Ihc sIrcm 0I Is crnngs
0r Is pIIcrn 0I nvcsImcnI rIhcr Ihn Ihc pIIcrn 0I dsIrbuI0n 0I Is pr0IIs.
Thcr c0nIcnI0n s IhI s l0ng s Ihc Irm hs cpIl pr0|ccIs wIh p0sIvc
NP\, I sh0uld c0nInuc I0 nvcsI n Ihcm s Ihs cI0n wll ncrcsc Ihc vluc
0I Ihc Irm.
Ths M & M sscrI0n ws bscd 0n Ihc ssumpI0ns 0I pcrIccI cpIl mrkcI
whcrc Ihcrc rc:
() N0 IrnscI0n c0sIs,
(b) N0 Il0II0n c0sIs,
(c) N0 Ixcs 0n crnngs, nd
(d) CcrInIy b0uI Ihc IuIurc crnngs 0I Ihc Irm.
Thc I0ll0wng p0nIs ppcr I0 I0rm Ihc bscs 0I M nd M's rgumcnI:
233
() !I pr0IIs wcrc dsIrbuIcd (nsIcd 0I bcng rcIncd) nd cxIcrnl
cquvlcnI cquIy Inncc hd I0 bc rscd I0 Inncc nvcsImcnI, Ihc
p0ssbly rcduccd vluc 0I Ihc shrc IIcr Inncng plus Ihc dvdcnds
pd wll bc cxcIly cqul I0 Ihc vluc 0I Ihc shrc bcI0rc Inncng.
0vdcnd pymcnIs, cc0rdng I0 M & M, Ihus hvc n0 cIIccI 0n shrc
vluc. Thc vluc 0I Ihc shrc w0uld hvc rcduccd bccusc m0rc shrcs
wcrc ssucd.
() !I shrch0ldcrs wcrc cxpccIng dvdcnds nd Ihcy dd rcccvc Ihc
dvdcnds, Ihcy c0uld rcplcc cxcIly Ihcsc dvdcnds by scllng shrcs
nd rcccvng csh. Thus, by Ihs cI0n, Ihcy c0uld mnuIcIurc "h0mc
mdc" dvdcnds. !I 0n Ihc 0Ihcr hnd, Ihc c0mpny pd Ihcm
dvdcnds, whcn n IcI Ihcy dd n0I nccd such csh, Ihcy c0uld usc
Ihc "Ircc" csh I0 buy shrcs 0I Ihc c0mpny 0n Ihc sI0ck mrkcI.
0vcn Ihs sccnr0, Ihc c0mpny s n0I d0ng I0r Ihc shrch0ldcrs
nyIhng Ihcy cnn0I d0 Ihcmsclvcs. !I s IhcrcI0rc n0I crcIng vluc.
scd 0n Ihc b0vc, Ihc IcI IhI c0mpny pys dvdcnd 0r d0cs n0I
py dvdcnd, cc0rdng I0 M & M s IhcrcI0rc mmIcrl I0 Ihc
nvcsI0rs.
Thc I0ll0wng rc p0nIs puI I0rwrd n Iv0ur 0I dvdcnd pymcnIs.
Thc IrdI0nl vcw 0I Ihc Ihc0ry 0I dvdcnds s IhI dvdcnds rc
Ihc sngulr dcIcrmnnI 0I vluc 0I shrc nd IhI Ihc rcccpI 0I Ihc
shrc 0I pr0IIs n0w, n I0rm 0I nc0mc rIhcr Ihn n IuIurc, n I0rm 0I
cpIl pprccI0n, cnhnccs Ihc vluc 0I Ihc shrc. Ths scc0nd
p0sI0n s n lnc wIh brd n hnd s w0rIh m0rc Ihn Iw0 n Ihc bush
rgumcnI s N pd n0w n csh s w0rIh m0rc Ihn N supp0scdly
rcIncd s IurIhcr nvcsImcnI. Asdc Ir0m Ihs, Ihc pymcnI 0I
dvdcnds hclp I0 rcs0lvc Ihc unccrInIy n Ihc mnds 0I nvcsI0rs
b0uI Ihc IuIurc crnngs p0IcnIl 0I Ihc c0mpny. !nvcsI0rs plcc
grcIcr rclncc 0n Ihc blIy 0I Ihc Irm I0 crn pr0IIs n IuIurc nd
py dvdcnds, rcducc Ihc rsk pcrccpI0n 0I Ihc c0mpny nd Ihs
ncrcscs Ihc vluc 0I Ihc c0mpny's shrcs, ll Ihngs bcng cqul.
Thcrc rc ccrIn cIcg0rcs 0I nvcsI0rs wh0, bccusc 0I Ihcr
cmpl0ymcnI sIIus 0r Ihcr Ix p0sI0n, w0uld prcIcr lcss 0I currcnI
nc0mc nd m0rc 0I cpIl pprccI0n. 0n Ihc 0Ihcr hnd, Ihcrc
wll bc s0mc gr0ups wh0 bccusc 0I Ihcr cc0n0mc cIvIcs w0uld
Iv0ur lcss 0I cpIl pprccI0n nd m0rc 0I currcnI nc0mc. Thc
234
IrsI gr0up mghI c0nssI 0I hghly pd w0rkcrs nd hgh mrgnl
nc0mc Ix pycrs wh0 w0uld prcIcr I0 buy shrcs 0I c0mpncs IhI
rcIn much 0I Ihcr pr0IIs. A c0mpny sh0uld dcnIIy such gr0up
nd cnsurc IhI Is dvdcnd p0lcy s gcrcd I0wrd Ihcr dcsrc. 0n
Ihc 0Ihcr hnd, Ihcrc cxsIs ccrIn nsIIuI0nl nvcsI0rs such s
pcns0n Iunds dmnsIrI0rs wh0 my bc Ix cxcmpI buI rcqurc
c0nsInI csh nIl0ws I0 mccI pymcnIs I0 pcns0ncrs. A c0mpny
IhI hs Ihcsc gr0ups 0I nvcsI0rs sh0uld cmphssc dvdcnd
pymcnIs s0 s I0 kccp Ihcr l0ylIy. Any dvdcnd p0lcy IhI s n0I n
lnc wIh Ihc gr0up's dcsrc wll 0nly cnc0urgc shII n nvcsI0rs'
l0ylIy. Smlrly, nc0nssIcncy 0I dvdcnd p0lcy wll IIrcI Ihc
smc cI0n. Thc cIIccI s IhI nvcsI0rs wh0 rc n0I hppy wIh
prIculr c0mpny's dvdcnd p0lcy w0uld wnI I0 scll Ihcr shrcs
0I IhI c0mpny (nd buy Ih0sc 0I Ihc c0mpny IhI mccIs Ihcr
dcsrc). Thc cI0n 0I Ihcsc nvcsI0rs w0uld pr0bbly crcIc
dcprcssng cIIccI 0n Ihc shrc prcc nd |crk up Is c0sI 0I cpIl.
AlIh0ugh, n0Ihcr gr0up 0I nvcsI0rs mghI bc buyng Ihcsc shrcs,
Ihc pr0ccss IsclI my hvc psych0l0gcl cIIccI 0n Ihc shrch0ldcrs.
Thc b0vc rgumcnI IypIcs Ihc ' ' 0r ' '
c0nccpI.
PymcnI 0I dvdcnds cn bc uscd by c0mpny I0 c0nvcy p0sIvc
nI0rmI0n I0 shrch0ldcrs b0uI Ihc c0mpny's IuIurc pr0IIblIy
whlc sIIcmcnI c0uld ls0 bc ssucd. H0wcvcr, n 0rdcr I0 mkc
Ihs sIIcmcnI b0uI mngcmcnI's nIcnI0n rcl, Ihc currcnI
dvdcndpy0uI rI0 mghI bc ncrcscd. Thc bclcI 0I mngcmcnI
hcrc s IhI cI0n spcks l0udcr Ihn w0rds.
Thc pymcnI 0I csh dvdcnds s IhcrcI0rc mcnI I0 sgnl I0 nvcsI0rs
IhI mngcmcnI cIully kn0ws nd bclcvcs IhI Ihc c0mpny's
Inncl sIuI0n s bcIIcr Ihn whI Ihc shrc prcc s sh0wng. !I
Ihs vcw s c0rrccI, Ihcn, Ihc ncrcsc n dvdcndpy0uI w0uld bc
cxpccIcd I0 crcIc p0sIvc mpcI 0n shrc prcc n Ihc sI0ck mrkcI.
Thc Ihc0rcIcl spccIs 0I dvdcnd p0lcy hvc, s0 Ir, bccn c0nsdcrcd. Thc
I0ll0wng wll dscuss Ihc prcIcl IcI0rs IhI sh0uld bc Ikcn nI0 cc0unI
whcn Irm s I0rmulIng dvdcnd p0lcy.
()
Thc mngcmcnI 0I c0mpny musI rcc0gnsc Ihc cxsIcncc 0I lws
gudng pymcnI 0I dvdcnds. F0r cxmplc, c0mpny sh0uld n0I
235
py dvdcnd 0uI 0I cpIl nd my 0nly py dvdcnds, cc0rdng I0
C0mpncs nd Allcd MIIcrs AcI (CAMA 990, s mcndcd) 0uI 0I:
() Pr0IIs rsng Ir0m Ihc usc 0I c0mpny's pr0pcrIy,
() Rcvcnuc rcscrvcs, nd
() Rclscd pr0II 0n Ixcd sscI s0ld
CAMA ls0 spccIcs IhI dvdcnds cn 0nly bc dcclrcd 0n Ihc
rcc0mmcndI0n 0I Ihc drccI0rs, nd ny m0unI s0 rcc0mmcndcd
cnn0I bc ncrcscd by Ihc gcncrl mccIng, lIh0ugh, I cn bc
rcduccd.
(b)
0ncc Ihc lcgl c0nsIrnIs hvc bccn clcrcd, mngcmcnI sh0uld
I0cus 0n Is IuIurc Inncl nccds ncludng IuIurc nvcsImcnI
0pp0rIunIcs. Ths sh0uld bc d0nc v budgcIcd s0urccs nd
pplcI0n 0I Iunds sIIcmcnIs, budgcIcd csh Il0w sIIcmcnIs nd
csh budgcI.
(c)
0vdcnds rc usully pd 0uI 0I csh. ThcrcI0rc, Ihc m0unI 0I
dvdcnd pd by Ihc c0mpny s lrgcly nIlucnccd by Ihc vlblc
csh rcs0urccs. Csh hs lIcrnIvc uscs wIhn Ihc Irm, mngcmcnI
my, IhcrcI0rc, wnI I0 gvc rcc0gnI0n I0 Ihs, pcrhps m0rc
mp0rInI lIcrnIvcs (nd ls0 bc pr0IccIcd gnsI Ihc IuIurc) nd
my, IhcrcI0rc, dccdc n0I I0 hvc hgh IrgcI dvdcndpy0uI.
(d)
A Irm my n0I bc lqud, buI my bc n sIr0ng p0sI0n I0 b0rr0w I
sh0rI n0Icc. Ths blIy cn bc by rrngng lnc 0I crcdI. Thc blIy
0I Irm I0 b0rr0w, 0IIcn lrgcly nIlucnccs Is blIy I0 mccI Is sh0rI
Icrm 0blgI0ns s nd whcn duc, ncludng pymcnI 0I csh
dvdcnds.
(c)
!I Ihc c0mpny s lrgc cn0ugh nd hs g00d cccss I0 Ihc c0rp0rIc
b0nd mrkcI, I nccds n0I b0Ihcr much b0uI Is lqudIy sIuI0n I0r
Ihc purp0sc 0I pyng csh dvdcnds.
(I)
RcsIrcI0ns 0n pymcnI 0I csh dvdcnds my bc cnIrcnchcd n
l0n grccmcnI.
23b
(7)
PymcnI 0I csh dvdcnds, supp0rIcd by subscqucnI rsng 0I
cxIcrnl Inncc my dluIc Ihc c0nIr0llng nIcrcsI 0I Ihc cxsIng
shrch0ldcrs, I Ihcy d0 n0I prIkc n Ihc pr0vs0n 0I such Inncc.
Thcsc shrch0ldcrs my, IhcrcI0rc, Iv0ur Inncng 0I nvcsImcnI
0pp0rIunIcs Ir0m rclIvcs.
8.b
An0Ihcr rc 0I dvdcnd p0lcy whch s 0I c0nccrn I0 mngcmcnI s whch
dvdcnd pymcnI p0lcy I0 I0ll0w: sIblc dvdcnd pcr shrc 0r sIblc py
0uI rI0.
Thc mngcmcnI 0I c0mpny IhI I0ll0ws Ihs p0lcy wnIs I0 bc pyng
nd mnInng n bs0luIc nr m0unI 0I dvdcnd pcr shrc. F0r
cxmplc, 80k0b0 pcr shrc mghI bc pd nnully 0n rcgulr bss
n0IwIhsIndng IhI crnngs rc IlucIuIng 0r IhI Ihc csh p0sI0n s
chngng 0vcr Imc.
Thc shrc 0I c0mpny IhI I0ll0ws Ihs p0lcy usully IIrcIs prcmum
bccusc 0I prcIcrcncc I0r currcnI rcgulr nc0mc 0I ccrIn nvcsI0rs, p0sIvc
sgnlng cIIccIs nd drccIvcs gvcn I0 ccrIn nsIIuI0ns. H0wcvcr, Ihc
I0ll0wng c0nsIrnIs lmI Ihc dcsrc 0I Irms I0 I0ll0w Ihs p0lcy.
() !I crcIcs Inncl c0mmImcnI 0n Ihc prI 0I Ihc c0mpny I0
mnIn IhI Ixcd Igurc cvcn n Ihc Icc 0I pr0IIblc nvcsImcnI
0pp0rIunIcs.
(b) !I Ihc Irm bcc0mcs llqud, I sIll hs I0 py Ihs Ixcd Nr dvdcnd.
(c) !n pcr0d whcn Ihc lcvcl 0I crnngs s l0w, Ihc dvdcnd pymcnI
musI sIll bc mcI.
(d) whcrc Ihc c0mpny s c0mpcllcd I0 py n m0unI bcl0w Ihc usul
Ixcd m0unI, I my cusc psych0l0gcl pr0blcm wIh p0ssblc
ncgIvc cIIccI 0n shrc prcc.
(c) Thc c0mpny my bc cxp0scd I0 Ikc0vcr bd, I I pys dvdcnd
bcl0w Ihc usul Ixcd m0unI.
Undcr Ihs p0lcy, Ihc c0mpny pys Ixcd pcrccnIgc 0I crnngs
s dvdcnd cvcry ycr. Ths mplcs vrblc Nr m0unI cvcry
ycr, dcpcndng 0n cch ycr's lcvcl 0I crnngs.
237
Thc 0nly dvnIgc I0 Ihc c0mpny whch I0ll0ws Ihs p0lcy s
IlcxblIy nd c0nvcncncc. Thc c0mpny 0nly pys n m0unI 0I
dvdcnd IhI s supp0rIcd by crnngs. Thc c0mpny s n0I lkcly I0
hvc ny pr0blcm pyng dvdcnds pr0vdcd Ihc crnngs rc
subsInIlly rclscd. H0wcvcr, Ihc I0ll0wng dsdvnIgcs mghI
0ccur I0 c0mpny IhI I0ll0ws Ihs p0lcy.
() whcn dvdcnds vry n lnc wIh crnngs lcvcl, nvcsI0rs
nIurlly l00k I Ihc c0mpny s nc0nssIcnI. Ths my crcIc
ncgIvc cIIccI 0n shrc prcc.
(b) A Ill n crnngs I0ll0wcd by dr0p n dvdcnd s p0nIcr I0
nvcsI0rs, 0I mngcmcnI' s Ihnkng b0uI Ihc IuIurc
pr0IIblIy 0I Ihc c0mpny. !I crnngs dr0p buI Ihc dvdcnd
lcvcl s sIll mnIncd, nvcsI0rs mghI sIll hvc s0mc
c0nIdcncc n Ihc blIy 0I mngcmcnI I0 wcIhcr Ihr0ugh
Ihc sI0rm.
(c) CcrIn nvcsI0rs IhI rcqurc spccIc pcr0dc nc0mc mghI
rnk Ihc c0mpny vcry l0w nd c0nscqucnIly Iry I0 dsp0sc Ihcr
shrcs wIh Ihc IIcndnI ncgIvc cIIccI 0n shrc prcc.
(d) CcrIn nsIIuI0nl nvcsI0rs, I0r cxmplc, Ihc Pcns0n Fund
AdmnsIrI0rs (PFAs) mghI nccd I0 bdc wIh spccIc
drccIvcs Ir0m Ihc rcgulI0ry uIh0rIy.
Thcsc rc dvdcnds rcc0mmcndcd by Ihc drccI0rs nd ppr0vcd nd dcclrcd
I Ihc nnul gcncrl mccIng (A0M). Thcy rc sub|ccI I0 wIhh0ldng Ix
nd rc n0rmlly pd 0uI 0I csh. 0cclrI0n nd pymcnI mghI s0mcImcs
puI prcssurc 0n Ihc c0mpny's lqudIy.
Thcsc rc dvdcnds ls0 rcc0mmcndcd by Ihc drccI0rs nd ppr0vcd nd
dcclrcd I Ihc nnul gcncrl mccIng (A0M). H0wcvcr, Ihcy rc pd Ihr0ugh
ssuc 0I 0rdnry shrcs 0I Ihc c0mpny s gnsI bcng pd by csh. Thcy
csscnIlly c0nsIIuIc IrnsIcr I0 Ihc shrch0ldcrs' ddI0nl shrcs wIh
n0 IurIhcr csh c0mng Ir0m Ihcm. Thc I0ll0wng sh0uld bc n0Icd b0uI scrp
dvdcnds:
() Thc dvdcnds hvc bccn dcclrcd, 0nly Ihcy d0 n0I nv0lvc pymcnI
0I csh.
(b) AcccpIncc 0I scrp dvdcnds by Ihc shrch0ldcrs s 0pI0nl.
(c) Scrp dvdcnds rc, lkc csh dvdcnds, Ixcd.
238
(d) Thc c0mpny w0uld bc blc I0 c0nscrvc csh nd usc I I0r 0Ihcr
w0rIhwhlc nvcsImcnI 0pp0rIunIcs.
(c) Thc ssuncc 0I scrp dvdcnd s wy 0uI 0I c0mpny's lqudIy
pr0blcms.
(I) Thc c0mpny mghI mkc s0mc svngs n Inncc chrgc nd Ihus
ncrcsc pr0IIblIy by n0I b0rr0wng I0 py dvdcnds.
(g) Thcrc w0uld bc ncrcsc n 0rdnry shrc cpIl bsc nd IhcrcI0rc
rcduccd gcrng lcvcl.
(h) Thcy rc suIblc I0r 0rdnry shrch0ldcrs wh0 rc nIcrcsIcd n
cpIl gn.
Scrp ssucs, ls0 kn0wn s b0nus ssuc, nv0lvc mcrc b00kkccpng cnIry,
cpIlzng Ihc cxsIng rcscrvcs 0I Ihc c0mpny nd smulInc0usly ssung
0rdnry shrcs I0 Ihc shrch0ldcrs I0 Ihc Iunc 0I Ihc m0unI cpIlscd.
Scrp ssucs rc Ihc rcsulI 0I Inncl pr0ccss, Ihc dcIls 0I whch hvc
bccn dscusscd crlcr n Ihs pck. !I sh0uld bc n0Icd, h0wcvcr, IhI s0mc
uIh0rs ls0 rcIcr I0 scrp ssucs s sI0ck dvdcnds.
Ths s rcducI0n n Ihc n0mnl 0r pr vluc 0I unI 0I shrc, Ihc rcsulI 0I
whch pr0p0rI0nlly ncrcscs Ihc numbcr 0I 0rdnry shrcs n ssuc. A
c0mpny my, I0r cxmplc, mkc shrc splI 0I 2 I0r by whch Ihc 0rgnl
n0mnl vluc 0I shrc sy N s rcduccd I0 N0.50 nd Ihc numbcr 0I
shrcs ncrcscs Iw0I0ld. !I sh0uld bc n0Icd IhI, unlkc b0nus ssuc, shrc
splI d0cs n0I chngc Ihc I0Il shrch0ldcrs cpIl. MngcmcnI mkcs
shrc splI whcrc I nIcnds I0 chcvc n pprccblc dccrcsc n Ihc mrkcI
vluc 0I c0mpny's shrc. Thc ulImIc purp0sc ws I0 mkc Ihc shrcs
m0rc mrkcIblc Ihcrcby p0ssbly IIrcIng m0rc nvcsI0rs.
Shrc c0ns0ldI0n, ls0 kn0wn s rcvcrsc shrc splI, s pr0ccss whcrcby
Ihc n0mnl vluc 0I shrc s ncrcscd, Ihc rcsulI 0I whch rcduccs Ihc
numbcr 0I shrcs n ssuc. A I0r 4 shrc c0ns0ldI0n mplcs IhI cch
shrch0ldcr w0uld rcccvc ncw shrc I0r 4 0ld shrcs lrcdy hcld by hm.
A n0mnl vluc 0I sy 25k pcr shrc mghI bc ncrcscd I0 N pcr shrc.
An 0rdnry shrch0ldcr wh0 currcnIly hs 2000 shrcs 0I 25k pcr shrc
wll n0w 0wn 500 shrcs 0I N pcr shrc. Shrc c0ns0ldI0n s uscd whcrc
239
mngcmcnI bclcvcs IhI Ihc shrc s scllng I vcry l0w prcc nd Ihs
pr0ccss w0uld pr0bbly |crk up Ihc prcc 0n Ihc sI0ck mrkcI.
Thc nn0unccmcnI 0I shrc c0ns0ldI0n, lkc shrc splI nd b0nus ssuc,
s lkcly I0 crcIc s0mc sgnlng cIIccIs s Ihs s usully Ikcn by nvcsI0rs
s c0mpny n Inncl pr0blcms. !n Ihc csc 0I shrc c0ns0ldI0n,
mngcmcnI mghI |usI wnI I0 m0vc Ihc shrc prcc I0 hghcr prcc rngc
wIhn whch Irdng cn bc Ikng plcc I l0wcr IrnscI0n c0sIs.
N0IwIhsIndng, mngcmcnI sh0uld crIclly sscss Ihc w0rIhncss 0I
shrc c0ns0ldI0n 0pcrI0n I0 v0d p0ssblc Ill n Ihc c0mpny's shrc
prcc.
Shrc rcpurchsc, ls0 kn0wn s 0r , s
Ihc rcpurchsc 0I Ihc shrcs 0I c0mpny Ir0m Is shrch0ldcrs by Ihc
c0mpny IsclI, cIhcr n Ihc 0pcn mrkcI (sI0ck cxchngc) 0r by Icndcr 0IIcr.
A c0mpny my wnI I0 rccqurc Is 0wn shrcs I0r Ihc purp0sc 0I chcvng
Is shrc0pI0n plns I0r Is I0p mngcrs. !I my ls0 wnI I0 buy bck Is
0wn shrcs I0r usc n shrcI0rshrc cxchngc schcmc n cqusI0n. S0mc
c0mpncs my wnI ll Ihcr shrcs I0, n0w, bc prvIcly 0wncd, hcncc
mngcmcnI mghI rcpurchsc Ih0sc shrcs 0wncd by cxIcrnl shrch0ldcrs.
!n 0Ihcr cscs, mngcmcnI mghI |usI wnI I0 rcdccm Ihc shrcs. !I sh0uld
bc n0Icd IhI shrc rcpurchsc ncgIcs Ihc vcw 0I Ihc IrdI0nlsIs 0n Ihc
Ihc0ry 0I dvdcnds IhI csh dvdcnds rc Ihc s0lc dcIcrmnnI 0I Ihc vluc
0I shrc.
!I sh0uld bc n0Icd IhI shrc rcpurchsc hs |usI bccn rcccnIly lcglscd 0n
Ihc Ngcrn sI0ck mrkcI.
!I s 0nly n UnIcd SIIcs IhI shrc rcpurchscs rc p0pulr, n 0Ihcr
c0unIrcs, Ihcy rc llcgl nd ycI n s0mc Ihcy rc unc0mm0n bccusc 0I
Ihcr IIcndnI Ix c0nscqucncc.
Thc dvdcnd p0lcy dccs0n 0I c0mpny s crIcl IcI0r n Ihc Inncl
mngcmcnI 0I IhI c0mpny. S0mc sch00ls 0I Ih0ughI bclcvc Ihcrc s
sIr0ng rclI0nshp bcIwccn dvdcnd pymcnIs nd Ihc vluc 0I Ihc Irm.
Thcsc rc Ihc IrdI0nlsIs. H0wcvcr, M & M bclcvc IhI Ihc pIIcrns 0I
dvdcnd pymcnIs d0 n0I IIccI Ihc vluc 0I Ihc Irm. Thc0rcIcl rcs0ns
wcrc dvnccd n supp0rI 0I cch p0sI0n. N0IwIhsIndng Ihc Ihc0rcIcl
pr0p0sI0ns 0n Ihc0ry 0I dvdcnds, Ihcrc rc prcIcl IcI0rs I0 bc c0nsdcrcd
n dcIcrmnng Ihc dvdcnd p0lcy 0I Irm. Thcsc ncludc lcgl c0nsIrnIs,
IuIurc Inncl rcqurcmcnIs, lqudIy, cpcIy I0r b0rr0wng nd s0 0n.
240
An0Ihcr spccI 0I Ihc dvdcnd p0lcy 0I Ihc Irm s whcIhcr Irm sh0uld
py Ixcd nr dvdcndpy0uI rI0, pplcd I0 nnul pr0IIs. AlIh0ugh
Ihc lIIcr p0lcy mghI hvc Is 0wn vrIuc, Ihc sIblc Ixcd nr pymcnI
pcr shrc s rcc0mmcndcd bccusc I gcncrIcs nvcsI0rs' c0nIdcncc n Ihc
blIy 0I Ihc mngcmcnI I0 pr0IIbly mngc Ihc c0mpny I0r n ndcInIc
IuIurc pcr0d.
Thcrc rc 0Ihcr c0nsdcrI0ns n dvdcnd dccs0ns IhI rc w0rIh
mcnI0nng. Thcsc rc Ihc scrp dvdcnds, scrp ssucs, shrc splI, shrc
c0ns0ldI0n nd shrc rcpurchsc. 0ccs0ns rcgrdng ll Ihcsc Inncl
0pcrI0ns rc n0rmlly mdc by mngcmcnI gnsI Ihc bckdr0p 0I Ihc
nccd I0 mxmzc shrch0ldcrs wclIh whch s Ihc prncpl Inncl
0b|ccIvc 0I sIrIcgc Inncl mngcmcnI.
8.4.
. whcn c0mpny IrcIs dvdcnd pymcnI s rcsdul, I mcns
() pyng dvdcnds s much s p0ssblc I0 shrch0ldcrs nd usng
Ihc blncc, I ny, I0 Inncc pr0IIblc nvcsImcnI.
() pyng Ixcd pcrccnIgc 0I nnul IIcrIx pr0IIs s dvdcnds
cvcry ycr
() Inncng ll pr0IIblc nvcsImcnIs IrsI nd usng Ihc blncc
(I ny) I0 py dvdcnds
A () 0nly
() nd ()
C () 0nly
0 () nd ()
E () 0nly
2. whch Ihc0ry sys IhI Ihc vluc 0I Ihc Irm s unIIccIcd by Ihc wy
vlblc pr0IIs rc shrcd bcIwccn rcIcnI0ns nd dvdcnd pymcnIs!
() Mrk0wIz Ihc0ry
() TrdI0nl Ihc0ry 0I dvdcnds
() M0dgln nd Mllcr (0rgnl vcrs0n) Ihc0ry
A () 0nly
() 0nly
C () 0nly
0 () nd ()
E () nd ()
3. Thc brdnhnd rgumcnI p0nI 0I dvdcnd pymcnIs s IhI 0I
() CAPM
() TrdI0nl Ihc0ry 0I dvdcnd
() M & M (0rgnl vcrs0n)
24
A () 0nly
() nd ()
C ()
0 () nd ()
E () 0nly.
4. whch 0I Ihc I0ll0wng d0cs N0T IIccI dvdcnd pymcnIs!
A FuIurc Inncl rcqurcmcnI 0I Ihc c0mpny
Lcgl c0nsIrnIs
C CurrcnI ycr's pr0IIs
0 LqudIy 0I Ihc c0mpny
E Acccss I0 Ihc cpIl mrkcI
5. whch 0NE 0I Ihc I0ll0wng sIIcmcnIs b0uI dvdcnds s N0T c0rrccI!
0vdcnds:
A rc rcc0mmcndcd by drccI0rs
rc ppr0vcd by Ihc shrch0ldcrs I Ihc Annul 0cncrl MccIng
(A0M)
C cn bc ncrcscd by Ihc shrch0ldcrs I Ihc A0M
0 cn bc rcduccd by Ihc shrch0ldcrs I Ihc A0M
E rc sub|ccI I0 wIhh0ldng Ix lw 0I Ihc c0unIry.
8.4.2
. Acc0rdng I0 M & M (0rgnl vcrs0n) Ihc0ry whI s h0mcmdc
dvdcnds!
2. SIIc Ihc mn lcgl rcsIrcI0n 0n pymcnI 0I dvdcnds.
3. !n Icrms 0I dcInI0n, whI s Ihc mn dIIcrcncc bcIwccn sIblc dvdcnd
pymcnI nd sIblc py0uI rI0!
4. !n Ihc Ihc0ry 0I Inncc, whch 0I Ihc I0ll0wng sIIcmcnIs s c0rrccI!
() 0vdcnds rc pd 0uI 0I pr0IIs
() 0vdcnds rc pd 0uI 0I csh.
() (), () 0r b0Ih.
5. 0vc n0Ihcr Icrm I0r scrp ssuc.
243
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ UndcrsInd Ihc nIurc 0I ncw ssucs mrkcI,
+ 0cscrbc Ihc mcIh0ds 0I rsng Inncc n Ihc mrkcI,
+ !Icmzc, scrlly, Ihc sIcps nv0lvcd n Ihc pr0ccdurc I0r mkng publc ssuc 0I
dcbI/cquIy,
+ ApprccIc Ihc sgnIcncc 0I prcng I0 Ihc publc ssuc 0I dcbI/cquIy,
+ LsI Ihc c0mp0ncnIs 0I shrc ssuc c0sIs,
+ !Icmzc, scrlly, Ihc sIcps nv0lvcd n Ihc pr0ccdurc I0r mkng 'prvIc plccmcnI'
0I dcbI/cquIy, nd
+ Expln rghIs ssucs nd cIIccIs 0I such ssucs 0n shrch0ldcrs' wclIh.
+ Expln b0nus ssucs nd cIIccIs 0I such ssucs 0n shrch0ldcr's wclIh.
As crlcr dscusscd, c0mpncs Inncc Ihcr l0ngIcrm nvcsImcnIs wIh
mx 0I nIcrnlly gcncrIcd Iunds nd Iunds rscd cxIcrnlly Ihr0ugh publc
ssucs, rghI ssucs nd prvIc plccmcnI 0I dcbIs 0r cquIcs. Als0, Ihc
Inncl mrkcIs, n gcncrl, hvc bccn dscusscd. !I s ncccssry I0 dscuss
h0w Inncl mngcrs 0I c0mpncs rsc Ihcsc Iunds n Ihc cpIl mrkcIs.
Thc mn I0cus n Ihs chpIcr wll bc Ihc prmry 0r ncw ssucs mrkcI wIh
cmphss 0n Ihc mcIh0ds IhI rc uscd nd Ihc pr0ccdurc n rsng Ihcsc
Iunds.
Thcsc Iunds rc pr0vdcd by Ihc 'surplus' sccI0r 0I Ihc cc0n0my mnly
ndvduls nd ccrIn Inncl nsIIuI0ns such s nsurncc c0mpncs,
pcns0n Iunds, unI IrusIs nd mcr0Inncc bnks. Sncc c0mpncs, whch
mnly 0ccupy Ihc 'dcIcI' sccI0r, d0 n0I hvc drccI lnk wIh Ihc svcrs,
s0mc Inncl nsIIuI0ns cllcd Inncl nIcrmcdrcs pr0vdc Ihs vcry
mp0rInI lnk. Thcsc Inncl nsIIuI0ns ncludc Ihc c0mmcrcl bnks,
Ihc mcr0Inncc bnks, nsurncc c0mpncs, pcns0n Iunds nd unI IrusIs.
Thcy hclp I0 chnncl Ihc svngs 0I Ihc surplus sccI0r I0 Ihc dcIcI sccI0r.
0Ihcr pr0mncnI nsIIuI0ns rc Ihc !ssung H0uscs (!nvcsImcnI nkcrs)
wIh wh0m c0mpncs nIlly csIblsh Ihcr lnk, Ihc sI0ckbr0kng Irms
(I0 Ihc ssuc), Ihc RcgsIrrs, Ihc Rcp0rIng Acc0unInIs nd Ihc S0lcI0rs I0
244
Ihc c0mpny. Ech 0I Ihcsc nsIIuI0ns plys 0nc r0lc 0r Ihc 0Ihcr n Ihc slc
nd purchsc 0I sccurIcs rclIng I0 ncw ssucs. Thcrc rc, 0I c0ursc, Ihc
rcgulI0ry uIh0rIcs Ihc Ngcrn SI0ck Exchngc (NSE) 0r smply "Thc
Exchngc" nd Ihc SccurIcs nd Exchngc C0mmss0n 'SEC' IhI cnsurc
m0ng 0Ihcr IuncI0ns 0rdcrlncss nd Irnsprcncy n Ihc mrkcI nd
pr0IccI0n 0I Ihc nvcsIng publc.
Ths mrkcI, ls0 cllcd Ihc prmry mrkcI s mrkcI I0r ncw ssucs 0I
sccurIcs, prncplly shrcs nd I Imcs dcbcnIurcs. Funds whch rc rscd
n Ihs mrkcI rc prmrly l0ngIcrm Iunds Ihr0ugh Ihc ssuncc 0I l0ng
Icrm Ixcd/vrblcnIcrcsI c0rp0rIc sccurIcs nd shrcs. Thcsc sccurIcs
rc b0ughI by nvcsIng publc wh0 puI d0wn Ihcr Iunds n cxchngc I0r
Ihcsc sccurIcs. Thc buycr 0I Ihcsc sccurIcs rc kn0wn gcncrlly s
nvcsI0rs. Thcy my bc lcndcrs whcn Ihcy hvc c0nIrcIul grccmcnI wIh
Ihc ssung c0mpny I0r Ihc rcccpI 0I pcr0dc nIcrcsI nd rcpymcnI 0I
Ihcr cpIl. Thcy my ls0 bc prI0wncrs 0I Ihc ssung c0mpny whcn n0
such c0nIrcIul grccmcnI cxsIs.
Thcrc rc Ivc mcIh0ds 0I mkng ncw ssucs n Ihc prmry mrkcI. Thcsc
rc 0IIcr I0r subscrpI0n, 0IIcr I0r slc, sI0ck cxchngc nIr0ducI0n, rghIs
0IIcr nd prvIc plccmcnI.
Thcsc rc ssucs 0I shrcs 0r dcbcnIurcs mdc drccIly by Ihc c0mpny
I0 Ihc publc. Thc pr0cccds 0I ssuc g0 drccIly I0 Ihc c0mpny I0
Inncc Is Ixcd sscIs, 0Ihcr cxpns0n pr0grmmcs nd w0rkng
cpIl s sIIcd n Ihc pr0spccIus. Thc c0mpny n0rmlly g0cs
Ihr0ugh n !ssung H0usc whch dvscs 0n such Ihngs s prcng
nd Imng 0I Ihc ssuc. Ths mcIh0d my bc uscd by c0mpncs
c0mng I0 Ihc mrkcI I0r Ihc IrsI Imc 0r lrcdy qu0Icd c0mpncs.
UndcrwrIng s usully ncccssry undcr Ihs mcIh0d.
Ths s n 0IIcr 0I cxsIng sccurIcs, I0 Ihc publc. Thcrc rc Iw0
kn0wn I0rms Ihs Iypc 0I 0IIcr my Ikc. FrsIly, I mghI 0ccur whcrc
Ihc ssung c0mpny nIlly sclls Ihc shrcs I0 n ssung h0usc
whch n Iurn sclls Ihc shrcs I0 Ihc nvcsIng publc I slghIly
hghcr prcc. Scc0ndly, I mghI 0ccur whcrc Ihc shrcs wcrc lrcdy
0wncd by g0vcrnmcnI nd I dccdcs I0 'prvIsc' Ihcsc h0ldngs. !n
b0Ih cscs, Ihc pr0cccds g0 I0 Ihc vcnd0r nd n0I Ihc c0mpny. M0sI
0I Ihc Fcdcrl 00vcrnmcnI prsIIls IhI wcrc s0ld undcr Ihc
245
prvIsI0n pr0grmmc Ill nI0 Ihc scc0nd cIcg0ry. UndcrwrIng
s, usully, n0I ncccssry n Ihs csc.
Undcr Ihs mcIh0d, Ihc c0mpny lrcdy hd wdc sprcd 0I
shrch0ldcrs nd s 0nly scckng qu0II0n 0n Ihc sI0ck cxchngc.
S0mc Ngcrn c0mpncs g0I lsIcd 0n Ihc sI0ck cxchngc v
nIr0ducI0n. Thcy hd lrcdy sIsIcd Ihc lsIng rcqurcmcnIs 0I
Ihc "Thc Exchngc" rcgrdng Ihc numbcr nd sprcd 0I shrch0ldcrs.
Ths s n 0IIcr I0 Ihc cxsIng shrch0ldcrs 0I Ihc c0mpny, usully I
prcc l0wcr Ihn Ihc currcnI mrkcI prcc. 0cIls 0I Ihs 0IIcr wll
bc dscusscd lIcr n Ihs chpIcr.
I
Undcr Ihs mcIh0d, sccurIcs rc s0ld I0 sclccI gr0up 0I nvcsI0rs
Ihr0ugh spccl drccI nvII0n I0 pr0spccIvc nvcsI0rs wh0 cn 0nly
subscrbc I0 such 0IIcr. Shrcs ssucd undcr Ihs mcIh0d w0uld n0I bc
lsIcd 0n Ihc sI0ck mrkcI, s0 subscqucnI Irdng n Ihcsc shrcs 0n
Ihc cxchngc w0uld n0I Ikc plcc.
9.3.b
Ths s vrI0n 0I n cxsIng mcIh0d 0IIcr I0r subscrpI0n. Undcr
Ihs mcIh0d shrcs rc 0IIcrcd I0 Ihc publc nd pr0spccIvc buycrs
rc rcqurcd I0 gvc Ihc prcc Ihcy rc wllng I0 py. Thc c0mpny
w0uld hvc rcscrvcd prcc Ihc prcc bcl0w whch Ihc c0mpny wll
n0I scll. 0IIcrs cn 0nly bc mdc I prccs b0vc Ihs prcc. Thc prcc
I whch Ihc ssucs rc cvcnIully mdc wll bc hghcsI prcc whch
wll bs0rb ll Ihc shrcs. Ths prcc s cllcd Ihc .
Pr0spccIvc buycrs wh0 qu0Icd hghcr Ihn Ihc sIrkng prcc w0uld
bc rcqurcd I0 py Ihc sIrkng prcc. Ths s Ihc prcc I whch ll Ihc
shrcs w0uld bc s0ld I. Ths mcIh0d 0I ssuc s suIblc I0r c0mpncs
g0ng I0 Ihc mrkcI I0r Ihc IrsI Imc, IhI s, mkng !nIl Publc
0IIcr (!P0). Ths s bccusc prcng my bc dIIculI nd I s, IhcrcI0rc,
ncccssry I0 ll0w Ihc publc I0 Ix Ihc prcc.
Thc sIcps whch my slghIly vry m0ng !ssung H0uscs rc:
() Thc c0mpny pp0nIs n !ssung H0usc, nImIng I 0I Is nIcnI0n
I0 rsc Iunds v Ihc cpIl mrkcI,
24b
(b) Thc !ssung H0usc dvscs Ihc c0mpny 0n mcIh0d 0I ssuc, prcng,
Imng nd s0 0n,
(c) Thc !ssung H0usc pp0nIs Ihc cxpcrIs Acc0unInIs, S0lcI0rs nd
s0 0n,
(d) Thc !ssung H0usc 0bIns ncccssry d0cumcnIs Ir0m Ihc c0mpny
nd prcprcs Ihc ImcIblc I0r Ihc ssuc,
(c) Flcs pplcI0n wIh Ihc SI0ck Exchngc nd SEC,
(I) Prcprc !ssuc d0cumcnIs, IhI s, Ihc drII pr0spccIus, pplcI0n
I0rms nd s0 0n,
(g) Arrngcs sIkch0ldcrs' mccIng I0 rIIy Ihc ssuc d0cumcnIs nd
rcvcw Ihc sIuI0n,
(h) Thc c0mpny h0lds Ihc c0mplcI0n 0rd MccIng I0 ppr0vc ll
d0cumcnIs rclIng I0 Ihc ssuc,
() 00cumcnIs rc Ilcd wIh Ihc C0rp0rIc AIIrs C0mmss0n (CAC),
(|) Thc c0mpny dvcrIscs Ihc ssuc n NI0nl dlcs nd scnds 0uI
Ihc pr0spccIus I0 Ihc sI0ckbr0kcrs nd rcccvng bnks,
(k) ApplcI0n lsIs rc 0pcncd I0r mnmum 0I 2 w0rkng dys (0r 28
dys I0r rghIs ssuc), cxIcns0n c0uld bc rcqucsIcd I0r, I nccd bc,
(l) ApplcI0n lsIs cl0sc. Rcccvng bnks nd sI0ckbr0kcrs submI
rcIurns I0 Ihc rcgsIrr,
(m) Thc !ssung H0usc nd Ihc c0mpny grcc 0n Ihc bss 0I ll0ImcnI
nd scnd Ihc pr0vs0nl ll0ImcnI schcdulc I0 SEC I0r ppr0vl,
(n) Thc ll0ImcnI c0mmIIcc 0I SEC h0lds mccIng I0 ppr0vc Ihc ssuc,
(0) AIIcr ppr0vl, !ssung H0usc gvcs nsIrucI0n I0 Ihc RcgsIrr I0 ssuc
shrcs/sI0ck ccrIIcIcs I0 nvcsI0rs n lnc wIh Inl ll0ImcnI lsIs,
(p) whcrc n nvcsI0r hs 0pIcd I0r hs shrcs I0 g0 Ihr0ugh Is CcnIrl
SccurIy Clcrng SysIcm (CSCS) cc0unI, hs rcc0rds w0uld bc
clccIr0nclly updIcd,
(q) !n Ihc cvcnI 0I 0vcrsubscrpI0n, Ihc shrcs w0uld bc ll0IIcd I0
shrch0ldcrs n n m0unI n0I cxcccdng 25 0I cxccss pr0cccds,
sub|ccI I0 ncrcsc n shrc cpIl nd ppr0vl I n Annul 0cncrl
MccIng (A0M). Such cxccss m0ncs rcccvcd shll bc hcld s dcp0sI
I0r shrcs pcndng ll0ImcnI,
247
(r) !ssung H0usc gvcs nsIrucI0ns I0 Ihc RcgsIrr I0 rclcsc shrcs /
sI0ck pr0cccds I0 Ihc c0mpny nd rcIurns I0 nvcsI0rs surplus m0ncs
n rcspccI 0I unll0IIcd rcqucsIs,
(s) !ssung H0usc gvcs nsIrucI0n I0 Ihc sI0ckbr0kcrs (I0 Ihc ssuc) I0
prcprc CcrIIcIcs 0I C0mplncc nd scnds smc I0 Ihc Ngcrn
SI0ck Exchngc, nd
(I) Thc NSE dmIs Ihc shrcs/sI0cks I0 Ihc 0IIcl lsI nd Irdng
c0mmcnccs mmcdIcly IhcrcIIcr.
Prcng 0I drccI ssucs I0 Ihc publc s crIcl dccs0n. Thc prcc musI bc
such IhI Ihc mxmum m0unI 0I csh pcr shrc s rscd 0n 0nc hnd nd
0n Ihc 0Ihcr hnd Ihc c0mpny v0ds Ihc rsk 0I undcr subscrpI0n. !I Ihc
prcc s unduly hgh, n0b0dy wll buy Ihc shrcs. !I I s unusully l0w cn0ugh
csh mghI n0I bc rscd. As mIIcr 0I IcI, Ihc c0mpny musI v0d puIIng
prcc whch s I dsc0unI I0 Ihc currcnI mrkcI prcc. !I cxsIng
shrch0ldcrs c0uld n0I prIkc cn0ugh n Ihc ncw ssuc s I0 mnIn Ihcr
0rgnl pr0p0rI0nl p0sI0n Ihcy w0uld suIIcr dr0p n Ihcr wclIh. !I
w0uld bc smlr I0 sIuI0n whcrc Ihcy d0 n0I Ikc up Ihcr rghIs.
Thcrc rc Iw0 wys I0 rcducc Ihc pr0blcms n prcng 0I ssucs:
() Thc shrc cn bc undcrwrIIcn, nd
(b) Thc shrcs cn bc ssucd v Icndcr 0IIcr.
Sh0uld ncw shrcs bc ssucd whcn Ihc prccs 0I shrcs n gcncrl 0r IhI 0I
Ihc c0mpny rc dcprcsscd! 0nc sch00l 0I Ih0ughI sys IhI I w0uld n0I bc
Ir I0 Ihc cxsIng shrch0ldcrs I ncw shrcs rc s0ld n dcprcsscd mrkcI
s 0uIsdcrs w0uld bcncII by buyng 'chcp' shrcs I Ihc cxpcnsc 0I Ihc
cxsIng shrch0ldcrs. !I s clmcd IhI ncw ssucs rc unlkc rghIs ssuc,
whcrc Ihc shrcs sIll g0 I0 Ihc cxsIng shrch0ldcrs. An0Ihcr sch00l 0I
Ih0ughI, h0wcvcr, dsgrccs by rgung IhI I Ihc sI0ck mrkcI s Iruly
cIIccnI, Ihc prcscnI mrkcI prcc 0I shrc wll rcIlccI Ihc 0pn0n 0I Ihc
gcncrlIy 0I ll nvcsI0rs 0n Ihc vluc 0I Ihc shrc I Ihc Imc. Thcrc s n0
rcs0n IhcrcI0rc I0 bclcvc IhI, bccusc shrc prccs hvc rcccnIly Illcn,
Ihcy hvc grcIcr chncc 0I:
() !ncrcsng n vluc, 0r
(b) 0ccrcsng IurIhcr n vluc, 0r
(c) Rcmnng unchngcd.
248
Ths s c0nIrcI whcrcby, n c0nsdcrI0n I0r Icc, n !ssung H0usc
undcrIkcs I0 Ikc up shrcs IhI rc n0I b0ughI n Ihc ncw ssuc mrkcI.
Ths cnsurcs IhI Ihc ssuc s succcss. !I Ihc ssuc s unsucccssIul cIhcr
bccusc 0I d0wnIurn n Ihc mrkcI 0r bccusc I s 0vcrprccd, Ihc undcrwrIcr,
n0I Ihc c0mpny, bcrs Ihc l0ss.
Ths s Ihc c0mmss0n pyblc by Ihc c0mpny I0 Ihc mn
undcrwrIcr. Ths c0mmss0n s n0rmlly Ixcd by Ihc undcrwrIcrs
Ihcmsclvcs, bscd 0n Ihc numbcr 0I shrcs Ihcy rc undcrwrIng,
Ihc 0IIcr prcc nd, 0I c0ursc, Ihc csImIcd rsk 0I Ihc shrcs bcng
undcrsubscrbcd by Ihc nvcsIng publc.
Thcrc my ls0 bc subundcrwrIng c0mmss0n whcrc Ihc
undcrwrIng s subc0nIrcIcd by Ihc mn undcrwrIcr I0 sub
undcrwrIcr. Thc s Ihc c0mmss0n
pyblc I0 Ihc subundcrwrIcr. Als0, Ihcrc s
. Ths s Ihc dIIcrcncc bcIwccn Ihc c0mmss0n rcccvcd
by Ihc mn undcrwrIcr nd Ihc 0nc pd I0 Ihc subundcrwrIcr.
Thc I0ll0wng rc Ihc c0mp0ncnIs 0I Ihc c0sI 0I ncw ssucs:
() LsIng Iccs: pyblc I0 Ihc SI0ck Exchngc nd bscd 0n Ihc m0unI
I0 bc rscd.
(b) Shrc vluI0n Iccs: pyblc I0 SEC nd c0mpuIcd s pcrccnIgc
0I Ihc n0mnl vluc 0I Ihc shrcs IhI w0uld bc ssucd.
(c) !ssung H0usc Icc: n0rmlly ncg0IIcd wIh Ihc c0mpny nd bscd
0n pcrccnIgc 0I Ihc I0Il m0unI I0 bc rscd.
(d) Fccs pyblc I0 Ihc sI0ckbr0kcrs I0 Ihc ssuc.
(c) Rcccvng bnks nd sI0ckbr0kcrs c0mmss0n.
(I) S0lcI0r's Iccs.
(g) Rcp0rIng Acc0unInIs' Iccs.
249
Thc I0ll0wng rc Ihc sIcps nv0lvcd n Ihc prvIc plccmcnI 0I dcbIs 0r
cquIcs.
() App0nImcnI 0I n !ssung H0usc,
(b) App0nImcnI 0I cxpcrIs,
(c) PrcprI0n 0I ImcIblc c0vcrng ll Ihc cnvsgcd cIvIcs I0 bc
undcrIkcn,
(d) Rcvcw 0I ll d0cumcnIs nd nI0rmI0n IhI hvc I0 bc scnI I0 SEC
I0r ppr0vl,
(c) Submss0n 0I d0cumcnIs n rcspccI 0I vluI0n, slc nd Imng 0I
Ihc ssuc I0 SEC,
(I) PrcprI0n 0I Ihc PlccmcnI Mcm0rndum,
(g) 0spIch 0I Ihc PlccmcnI Mcm0rndum I0 ndvduls, c0rp0rIc
b0dcs nd Inncl nsIIuI0ns wh0 musI hvc hd pr0r kn0wlcdgc
0I Ihc pcndng ssuc,
(h) ApplcI0n I0rms scnI l0ng wIh Ihc PlccmcnI Mcm0rndum,
() RcccpI 0I c0mplcIcd pplcI0n I0rms nd m0ncs Ir0m Ihc
pr0spccIvc prvIc nvcsI0rs,
(|) M0ncs rcccvcd rc puI nI0 spccl cc0unI kn0wn s "Ihc !ssuc
Pr0cccds Acc0unI",
(k) RcIurns nd m0ncs c0llccIcd rc nlyscd nd pr0vs0nl ll0ImcnI
schcdulcs prcprcd,
(l) C0pcs 0I Ihc pr0vs0nl ll0ImcnI schcdulcs rc scnI I0 SEC,
(m) SEC Ixcs Ihc ll0ImcnI mccIng dIc,
(n) All0ImcnI mccIng Ikcs plcc nd Inl ll0ImcnI s grccd,
(0) A chcquc s rscd rclcsng Ihc m0ncs, lcss ll unpd Iccs, I0 Ihc
c0mpny,
(p) Surplus Iunds rc rcIurncd I0 Ihc subscrbcrs, nd
(q) PrcprI0n 0I shrcs/ sI0ck ccrIIcIcs nd dspIch 0I smc I0
subscrbcrs.
250
RghIs ssucs, ls0 kn0wn s ' ' 0r '
' rc 0IIcrs I0 Ihc cxsIng shrch0ldcrs I0 subscrbc csh I0r
ddI0nl shrcs n Ihc pr0p0rI0n 0I Ihcr cxsIng h0ldngs I prcc whch
s pprccbly bcl0w Ihc currcnI mrkcI prcc. Thc ssucs rc n0rmlly
c0nvcycd I0 Ihc shrch0ldcrs Ihr0ugh Ihc ssuncc 0I rghIs crculr. Thc
crculr w0uld spccIy Ihc Icrms 0I Ihc 0IIcr. Thcsc ncludc:
() Thc numbcr 0I rghIs nccdcd I0 subscrbc I0r ddI0nl shrc(s),
(b) Thc subscrpI0n prcc, nd
(c) Thc cxpry dIc I0r Ihc cxcrcsc 0I Ihc rghI.
!n ddI0n, 0pI0ns w0uld bc gvcn I0 shrch0ldcr I0 cxcrcsc Ihc rghI nd
Ikc up Ihc shrcs n Iull 0r scll ll Ihc rghIs I0 s0mc0nc clsc 0r scll cn0ugh
rghIs IhI wll gvc hm cn0ugh csh I0 subscrbc I0r Ihc blncc 0r lsIly I0
d0 n0Ihng.
A c0mpny prcscnIly hs n ssuc mll0n N cquIy shrcs. !I plns I0 mkc
I0r 4 rghIs ssuc I subscrpI0n prcc 0I N3.b0. Assumc IhI Ihc shrcs
|usI bcI0rc Ihc rghIs ssuc wcrc scllng 0n Ihc sI0ck mrkcI I N4.
(). ClculIc Ihc Ihc0rcIcl cxrghIs prcc nd Ihc vluc 0I Ihc rghI.
(b). Advsc shrch0ldcr wh0 hs 2000 shrcs n Ihc c0mpny 0n whI I0
d0 0n rcccpI 0I rghIs crculr nd 0n Ihc cIIccI 0I hs cI0n 0n hs
wclIh.
0rgnl nIcrcsI 4 4.00 b.00
RghIs 3.b0 3.b0
Enlrgcd nIcrcsI 5 9.b0
Thc0rcIcl cxrghIs prcc =
5
b0 . 9
!I IIcr Ihc ssuc, Ihc shrcs rc qu0Icd I Ihc Ihc0rcIcl cxrghIs
prcc Ihcrc wll bc Ill n vluc 0I Ihc c0mpny's shrc 0I 8k pcr
N
25
shrc, buI I0 c0unIcr Ihs dvcrsc cIIccI, shrch0ldcrs w0uld subscrbc
I0r ncw shrcs I prcc 0I N3.b0 whch w0uld Ihcn bc w0rIh N3.92,
gn 0I 32k (8k pcr 0ld shrc, IhI s, 32k/4), Ihc cIIccI 0I Ihc rghIs
ssuc s, IhcrcI0rc, I0 crcIc n0 gn, n0 l0ss sIuI0n.
Ths s Ihc gn shrch0ldcr s cxpccIcd I0 mkc I hc cxcrcscs hs
rghI. !I s cxprcsscd s I0ll0ws:
Thc0rcIcl cxrghIs prcc SubscrpI0n (rghIs) prcc
= N3.92 N3.b0 = N0.32 0r 32k
!n Icrms 0I 0ld shrcs Ihs s cqul I0 32k/4 = 8k
N0Ic IhI Ihs s cxcIly cqul I0 Ihc dIIcrcncc bcIwccn Ihc cumrghIs
prcc nd Ihc Ihc0rcIcl cxrghIs prcc.
(b)
Hc hs I0ur 0pI0ns 0pcn I0 hm
()
\luc 0I nIcrcsIs bcI0rc Ihc rghIs ssuc = N8,000
.c. 2000 shrcs x N4.
\luc 0I nIcrcsIs IIcr Ihc rghIs ssuc
N0 0I Shrcs IIcr Ihc rghIs
2500

2000
x
4

2000 = |
.
|

\
|
+ =
\luc = 2500 x N3.92 = N9,800
Lcss: Csh UIlscd n subscrbng I0r Ihc rghIs
\luc = 500 x N3.b0 (N,800)
N 8,000
Thcrc s n0 cIIccI 0n Ihc shrch0ldcr's wclIh.
252
() N
\luc 0I nIcrcsIs bcI0rc Ihc rghI ssuc = 8,000
\luc 0I nIcrcsIs IIcr Ihc rghIs ssuc
(2,000 x N 3.92) 7,840
+ (500 x N0.32) b0
N0 cIIccI 0n hs wclIh
()
Pr0p0rI0n I0 scll
prcc RghIs cx l Thc0rcIc
cc Pr 0n SubscrpI

=
92 . 3
b0 . 3
=
= 9.8
\luc 0I nIcrcsI bcI0rc Ihc rghIs ssuc N8,000
\luc 0I nIcrcsI IIcr Ihc rghIs ssuc
Pr0cccds 0I slc 0I rghIs 459 @ N0.32 = 4b.88
Am0unI subscrbcd 4@ N3.b0 = (47.b0)
\luc 0I nIcrcsI = 204 @ N3.92 N8,000.72
N0 cIIccI 0n wclIh
(v) N
\luc 0I nIcrcsIs bcI0rc rghIs ssuc = 8,000
\luc 0I nIcrcsIs IIcr rghIs ssuc
= 2,000 x N3.92 7,840
Fll n wclIh = (b0)
!I hc d0cs n0Ihng, Ihc shrch0ldcr w0uld suIIcr l0ss n hs
wclIh.
S0 Ir, I hs bccn ssumcd IhI Ihc cIul cxrghIs prcc wll bc cqul I0
Ihc Ihc0rcIcl cxrghIs prcc. H0wcvcr, Ihs my n0I bc s0 I0r Ihc I0ll0wng
rcs0ns:
() 0cncrl IcI0rs IIccIng Ihc mrkcI s wh0lc my cusc cIul
mrkcI prcc I0 Ill sh0rI 0I 0r bcl0w Ihc Ihc0rcIcl cxrghIs prcc.
(b) Mny shrch0ldcrs 0IIl0dng Ihcr rghIs Ihcrcby crcIng cxccss
supply 0n Ihc mrkcI. Thc p0ssblc 0uIc0mc s Ihc cIul prcc Illng
bcl0w Ihc Ihc0rcIcl cxrghIs prcc.
(c) !nvcsI0rs my n0I hvc IIh n Ihc mngcmcnI's blIy I0 uIlzc
Ihc rghIs' Iunds cIIccnIly nd IhcrcI0rc mnIn Ihc smc dvdcnd
N
N
253
rIc 0n Ihc cnlrgcd cpIl bsc. Ths s, ls0 lkcly I0 cusc Ihc cIul
prcc Illng bcl0w Ihc cxpccIcd mrkcI prcc.
(d) !nvcsI0rs my, 0n Ihc 0Ihcr hnd, hvc mxmum c0nIdcncc IhI Ihc
usc I0 whch Ihc rghIs Iunds rc puI s g0ng I0 dd vluc I0 Ihc
busncss, n Ihs csc Ihc cIul prcc my rsc b0vc Ihc Ihc0rcIcl
cxrghIs prcc.
9.0.
Prcng 0I rghIs ssuc s n0I s crIcl s prcng 0I ncw ssucs 0I
shrcs I0 Ihc nvcsIng publc s wh0lc. Fr0m Ihc p0nI 0I vcw 0I
nvcsI0rs, I w0uld hvc bccn sccn, Ir0m Ihc b0vc, IhI s l0ng s
shrch0ldcr Ikcs up hs rghIs 0r sclls Ihcm, hs wclIh w0uld n0I bc
IIccIcd by Ihc ssuc 0I rghIs by Ihc c0mpny. scd 0n Ihs rcs0nng,
whch ws c0nIrmcd by vr0us clculI0ns, I cn bc sd IhI
shrch0ldcr's wclIh wll n0I bc cqully IIccIcd by Ihc subscrpI0n
prcc 0I rghIs ssuc. H0wcvcr, Ir0m Ihc sIndp0nI 0I c0mpncs,
Iw0 p0nIs sInd 0uI.
() A subscrpI0n prcc I dsc0unI I0 Ihc currcnI mrkcI prcc
cxcrIs prcssurc 0n shrch0ldcr I0 Ikc up hs rghIs 0r scll
Ihcm. Ths hs Ihc cIIccI 0I mkng Ihc ssuc succcss s rcgrds
Ihc shrcs bcng Iully Ikcn up nd Ihc m0unI rcqurcd by Ihc
c0mpny Iully rcc0vcrcd.
(b) A subscrpI0n prcc I n pprccblc dsc0unI bcl0w Ihc
currcnI mrkcI prcc wll cnsurc IhI Ill n cIul mrkcI
prcc, I0ll0wng Ihc dIc 0I nn0unccmcnI buI bcI0rc Ihc dIc
0I Ihc rghIs ssuc, d0cs n0I cusc Ihc cIul mrkcI prcc I0
Ill bcl0w Ihc subscrpI0n prcc. !I Ihs hppcns, nvcsI0rs
w0uld prcIcr buyng Ihc shrcs n Ihc 0pcn mrkcI Ihn
subscrbng I0r Ihc rghIs. Thc nIurl rcsulI s Ihc Ilurc 0I
Ihc rghIs ssuc.
9.0.2
Thc I0ll0wng IcI0rs rc rclcvnI:
() RclIvcly chcp n Icrms 0I ssuc c0sIs whcn c0mprcd wIh
rsng 0I cquIy Inncc.
(b) Prcng 0I rghIs ssucs s n0I crIcl, s ndcIcd b0vc.
(c) Flurc rIc s l0w. Ths s n ssurncc IhI c0mpny wll bc
blc I0 0bIn Ihc Iunds I rcqurcd.
254
(d) RghIs ssucs, crcIcs I0rccd nvcsImcnI 0r I0rccd slc
cnvr0nmcnI, whch my mkc Ihc shrcs unp0pulr wIh Is
IIcndnI dvcrsc cIIccI 0n shrc prcc. !n 0rdcr n0I I0 l0sc 0uI
by d0ng n0Ihng, nvcsI0rs musI cIhcr Ikc up Ihcr rghIs 0r
scll Ihcm. N0IwIhsIndng IhI prIl slc s p0ssblc,
nvcsI0rs musI sIll d0 s0mcIhng.
9.
0nus ssuc ws dcIncd crlcr nd c0mprcd wIh scrp dvdcnd/
csh dvdcnd. !Is sgnIcncc 0r 0Ihcrwsc s mcIh0d 0I rsng
ddI0nl cquIy Inncc wll n0w bc dscusscd. 0nus ssucs s
s0urcc 0I ddI0nl Inncc ppcr I0 bc Ihc m0sI mp0rInI I0 Ihc
c0mpny m0ng Ihc Ihrcc mn s0urccs b0nus ssucs, rghIs ssucs
nd publc ssucs.
!n b0nus ssucs, rcscrvcs rc mcrcly cpIlzcd nd 'Ircc' 0rdnry
shrcs rc ssucd (I0r Ihc m0unI s0 cpIlzcd) I0 cxsIng
shrch0ldcrs n Ihc pr0p0rI0n 0I Ihcr prcscnI h0ldngs, I0r cxmplc,
0n I0r 2 bss.
Thc 0b|ccIvc 0I mkng b0nus ssuc s I0:
() !ncrcsc Ihc ssucd shrc cpIl I0 n m0unI whch s
m0rc n lnc wIh Is Iruc vluc, bscd 0n b00k vluc 0I
Ihc c0mpny's ncI sscIs, nd
(b) Ersc Ihc msundcrsIndngs crcIcd whcn dvdcnds
0n 0rdnry shrcs rc cxprcsscd s pcrccnIgc 0I
ssucd cpIl whcrcs Ihcsc dvdcnds, wcrc Ir0m
pr0IIs crncd by cIIccIvc cquIy cpIl IhI s, cpIl
cmpl0ycd.
XY Plc hs Ihc I0ll0wng cpIl sIrucIurc
4 mll0n 0rdnry shrcs 0I 50k cch 2,000
Rcvcnuc rcscrvcs 3,000
Pr0II nd l0ss blncc ,000
XY Plc dccdcs I0 mkc b0nus (scrp) ssuc 0n I0r 2 bss by cpIlzng
prI 0I Is rcvcnuc rcscrvcs.
255
Usng Ihc b0vc nI0rmI0n, sIIc nd cxpln Ihc cIIccI 0I Ihc ssuc n cch
csc, 0n
() Thc mrkcI prcc 0I Ihc c0mpny's shrcs,
(b) Thc 0rdnry shrch0ldcr's nIcrcsIs,
(c) Thc prcIcrcncc shrch0ldcrs' nIcrcsIs,
(d) Thc crcdI0rs.
Sh0w rclcvnI clculI0ns I0 supp0rI y0ur nswcr
N'000
b mll0n 0rdnry shrcs 0I 50k cch 3,000
Rcvcnuc rcscrvcs 2,000
Pr0II nd l0ss blncc ,000
Fr0m Ihc rcdrIIcd blncc shccI, Ihc ncI sscIs I0Il vluc hs n0I chngcd
I Nbm. H0wcvcr, ncI sscIs vluc pcr shrc hs dr0ppcd Ir0m
000 , 000 , b
000 , 000 , b
I0
000 , 000 , 4
000 , 000 , b
N.50 I0 N.00
().
Thc mrkcI prcc s cxpccIcd I0 Ill I0 N I0ll0wng Ihc b0nus ssuc.
H0wcvcr Ihc cIul mrkcI prcc my n0I Ill up I0 Ihs p0nI bccusc
0I Ihc Iv0urblc mprcss0n b0nus ssucs supp0scdly crcIc n Ihc
mnds 0I nvcsI0rs.
().
0nus ssucs d0 n0I hvc ny rcl cc0n0mc cIIccIs 0n shrch0ldcrs'
nIcrcsI. A shrch0ldcr wIh sy 0,000 0rdnry shrcs wll hvc hs
0r hcr nIcrcsI vlucd I N5,000 (0,000 x N.50) bcI0rc Ihc b0nus
ssuc. AIIcr Ihc b0nus ssuc hs 0r hcr nIcrcsI wll sIll bc vlucd I
N5,000 (5,000 X N). H0wcvcr, I Nr dvdcnd pcr shrc s
mnIncd nI0 Ihc IuIurc, shrch0ldcrs w0uld 0bv0usly bcncII s
Ihcy w0uld rcccvc m0rc csh dvdcnds n IuIurc. Als0 rcducI0n n
mrkcI prcc I Imcs cnhnccs Irdng 0I Ihc shrc whch my pcrhps
puI Ihc shrc n hghcr prcc rngc.
N N
25b
().
A b0nus ssuc pr0vdcs rcl bcncII whch cn 0nly c0mc 0uI 0I Ihc
cquIy 0I Ihc c0mpny
(v).
0nus ssuc gvcs s0mc bcncII I0 Ihc cxIcnI IhI dsIrbuIblc pr0IIs
rc n0w cpIlscd.
!I s 0IIcn clmcd IhI rcscrvcs c0nsIIuIc Ircc s0urcc 0I Iunds. H0wcvcr
Ihs s n0I s0, s Ihcy hvc 0pp0rIunIy c0sIs. Rcscrvcs rcprcscnI Iunds IhI
sh0uld hvc bccn dsIrbuIcd s csh dvdcnds whch whcn rcccvcd cn bc
nvcsIcd n 0Ihcr sscIs. Thc c0sI 0I shrcs s Ihc c0sI smlr I0 IhI 0I Ihc
0rgnl shrcs 0I Ihc smc c0mpny.
Thc I0ll0wng IcI0rs rc rclcvnI:
() EIIccI 0n shrch0ldcr's wclIh.
(b) Abscncc 0I ssuc c0sIs.
(c) Pr0IIs rc rsky.
(d) Abscncc 0I dluI0n 0I c0nIr0l.
Thc ncw ssucs mrkcI s mrkcI I0r ssuc 0I ncw shrcs nd dcbcnIurcs. !I
s l0ngIcrm Inncl mrkcI whcrc shrcs / dcbcnIurcs rc ncwly s0ld
nd b0ughI. A c0mpny g0cs I0 Ihs mrkcI I0 cnblc I Inncc Ixcd sscIs
nd I0 s0mc cxIcnI w0rkng cpIl.
Thc mcIh0ds 0I rsng Iunds by c0mpncs c0mprsc mnly 0IIcr I0r
subscrpI0n nd 0IIcr I0r slc. 0Ihcrs rc rghIs 0IIcr, 0IIcr by Icndcr, prvIc
plccmcnIs nd nIr0ducI0n. SI0ck cxchngc nIr0ducI0n s n0I rclly
mcIh0d 0I rsng Iunds s n0 csh s c0mng I0 Ihc c0mpny 0r Is
shrch0ldcrs.
Thc pr0ccdurc I0r rsng Iunds v dcbI/cquIy musI bc kn0wn nd pr0pcrly
I0ll0wcd. Thc cnggcmcnI 0I Ihc !ssung H0usc by Ihc c0mpny s vcry
mp0rInI. Thc mcIh0d 0I ssuc I0 usc, Ihc prcng nd Imng 0I ssucs rc
bcIIcr hndlcd by pr0Icss0nls. A wcll cxpcrcnccd nd wcll kn0wn !ssung
257
H0usc sh0uld bc cnggcd s0 s I0 gurnIcc Ihc succcss 0I Ihc ssuc. A publc
ssuc sh0uld s much s p0ssblc bc undcr wrIIcn.
RghIs ssucs rc vcry mp0rInI s0urccs 0I Inncc I0r Ihc c0mpny. Thcy rc
ssucs I0 cxsIng shrch0ldcrs wh0 sh0uld cIhcr Ikc up Ihcr rghIs n Iull
0r scll Ihcm s0 IhI Ihcr wclIh s mnIncd. A 'd0 n0Ihng' c0ursc 0I cI0n
mghI lcd I0 Ill n vluc 0I n nvcsI0r's wclIh.
0nus ssucs rc ssucs ls0 I0 cxsIng shrch0ldcrs buI Ircc 0I chrgc. Hcrc
rcscrvcs whch lrcdy bcl0ng I0 Ihc shrch0ldcrs rc 0nly bcng cpIlscd.
Thus, Ihc ssuc mghI n0I hvc ny cc0n0mc cIIccI 0n Ihcr nIcrcsIs.
9.5.
. whch 0I Ihc I0ll0wng s N0T c0rrccI b0uI Ncw !ssucs MrkcI!
A !I s mrkcI I0r cxsIng sccurIcs.
!I s prmry mrkcI.
C !I s mrkcI I0r ncw ssucs 0I sccurIcs.
0 !I cxsIs I0r mkng nIl publc 0IIcrs (!P0s).
E !ssucs c0uld bc mdc by Icndcr.
2. whch 0I Ihc I0ll0wng s n0I rclly mcIh0d 0I rsng cpIl Ir0m
cxsIng nd pr0spccIvc shrch0ldcrs!
A 0IIcr I0r slc.
0IIcr I0r subscrpI0n.
C RghIs 0IIcr.
0 SI0ck Exchngc !nIr0ducI0n.
E 0IIcr by Icndcr.
3. whI s 0vcrrdng c0mmss0n n rclI0n I0 undcrwrIng cIvIcs 0I
Ihc prmry mrkcI undcrwrIcrs!
() C0mmss0n rcccvcd by Ihc mn undcrwrIcr
() C0mmss0n pd I0 Ihc subundcrwrIcr
() 0IIcrcnIl c0mmss0n bcIwccn Ihc c0mmss0n rcccvcd by Ihc
mn undcrwrIcr nd Ihc c0mmss0n pd I0 Ihc subundcrwrIcr
A () 0nly
() 0nly
C () nd ()
0 () 0nly
E () nd ()
258
4. whch 0I Ihc I0ll0wng s N0T c0sI 0I ncw ssucs!
A LsIng Iccs
r0kcrgc C0mmss0n
C S0lcI0rs' Iccs
0 Rcp0rIng cc0unInI's Iccs
E Shrcs \luI0n Iccs
5. whch 0I Ihc I0ll0wng s N0T c0rrccI b0uI rghIs !ssucs!
A Thcy rc ssucs I0 Ihc cxsIng shrch0ldcrs
!ssucs rc usully mdc I hghcr prcc I0 Ihc currcnI mrkcI
prcc 0I Ihc c0mpny's shrc.
C !ssucs rc mcns 0I rsng Iunds by c0mpncs.
0 !ssucs cnsurc mnIcnncc 0I Ihc pr0p0rI0nl nIcrcsIs 0I Ihc
shrch0ldcrs
E Prcng s n0I s crIcl s n nIl publc 0IIcrng.
9.5.2
. SIIc 0nc mn dIIcrcncc bcIwccn 0IIcr I0r slc nd 0IIcr I0r subscrpI0n.
2. A mcIh0d 0I rsng cpIl whcrcby 0IIcrs rc mdc by Ihc c0mpny I0
sclccI gr0up s cllcd ________________
3. SIIc 0nc wy n whch Ihc pr0blcm 0I prcng ncw ssucs n Ihc prmry
mrkcI cn bc rcduccd.
4. 0vc n0Ihcr nmc I0r rghIs ssuc (0r 0IIcr)
5. !n rclI0n I0 Ihc cccpIncc 0I Ihc 0IIcr by cxsIng shrch0ldcrs, whI
s Ihc mn dIIcrcncc bcIwccn b0nus !ssuc nd rghIs ssuc!
259
AIIcr sIudyng Ihs chpIcr, Ihc rcdcrs sh0uld bc blc I0:
+ UndcrsInd Ihc brcI hsI0ry nd mcmbcrshp 0I Ihc Ngcrn sI0ck cxchngc
(NSE),
+ SIIc Ihc r0lcs 0I sI0ck cxchngcs n gcncrl,
+ 0cscrbc Ihc Irdng mcchnsm 0I 'Thc Exchngc',
+ !Icmsc Ihc sIcps nv0lvcd n Ihc cqusI0n/dsp0sl, scIIlcmcnI nd IrnsIcr
pr0ccdurcs,
+ 0cscrbc Ihc Irdng, clcrng nd scIIlcmcnI pr0ccsscs 0I Ihc Ngcrn SI0ck
Exchngc/CcnIrl SccurIcs Clcrng SysIcm (CSCS),
+ SIIc Ihc c0mp0ncnIs 0I IrnscI0n c0sIs 0n Ihc Ngcr SI0ck Exchngc,
+ Expln Ihc c0nccpIs 0I 'Prcng', 'MrkcI CpIlsI0n' nd 'Prcc !ndcx',
+ SIIc Ihc dIIcrcnccs bcIwccn Ihc lsIng rcqurcmcnIs 0I Ihc IrsI Icr sccI0r nd
Ihc cmcrgng mrkcIs sccI0r,
+ SIIc Ihc dvnIgcs nd dsdvnIgcs 0I lsIng 0n Ihc sI0ck cxchngc,
+ Expln Ihc CcnIrl SccurIcs Clcrng SysIcm (CSCS) nd sIIc Ihc sIcps nv0lvcd
n Is clcrng nd scIIlcmcnI mcchnsms,
+ 0scuss Ihc I0rms 0I sI0ck mrkcI cIIccncy n gcncrl,
+ SIIc Ihc mplcI0ns 0I sI0ck mrkcI cIIccncy I0r b0Ih Ihc nvcsI0rs nd Inncl
mngcrs, nd
+ Asscss Ihc sIIc 0I Ihc Ngcrn SI0ck Exchngc vsvs mrkcI cIIccncy.
As crlcr dcIncd, cpIl mrkcIs rc mrkcIs whcrc l0ngIcrm Inncc s
rscd by c0mpncs nd Fcdcrl, SIIc nd l0cl g0vcrnmcnIs. Thc cpIl
mrkcIs c0mprsc Ihc prmry cpIl mrkcI mrkcI I0r ncw Iunds nd
Ihc scc0ndry cpIl mrkcI mrkcI I0r cxsIng (scc0ndhnd) sccurIcs.
Thc I0cus 0I Ihs chpIcr s 0n Ihc scc0ndry cpIl mrkcI n whch cquIcs
chngc hnds bcIwccn 0nc nvcsI0r nd Ihc 0Ihcr. Purchsc nd slc 0I sI0cks
nd shrcs d0 Ikc plcc nywhcrc nd such IrnscI0ns d0 n0I hvc I0 bc
0n Ihc Il00r 0I n cxchngc buldng. Thus, Ihc scc0ndry cpIl mrkcI s
2b0
ny plcc whcrc qu0Icd l0ngIcrm sccurIcs 0I c0mpncs nd g0vcrnmcnI
rc Irdcd. N0IwIhsIndng Ihc b0vc, Ihc m0sI mp0rInI prI 0I Ihc
scc0ndry cpIl mrkcI nywhcrc n Ihc w0rld s Ihc c0unIry's 0IIcl sI0ck
cxchngc 0r sI0ck mrkcI. M0sI 0I Ihcsc 0IIcl sI0ck cxchngcs IulIll
prmry IuncI0n s wcll s scc0ndry 0nc. M0sI 0IIcl sI0ck cxchngcs
prIculrly n UK nd USA, rc kn0wn I0 bc I0rums I0r Irdng n
nIcrnI0nl sccurIcs, n ddI0n I0 l0cl 0ncs.
Thc Ngcrn SI0ck Exchngc (NSE) ws nc0rp0rIcd n 9b0 s c0mpny
lmIcd by gurnIcc nd sIrIcd 0pcrI0ns n Lg0s n 9b. F0rmcrly
kn0wn s Lg0s SI0ck Exchngc, I prcscnIly hs Is Hcd0IIcc n Lg0s
nd brnchcs n Abu|, Kdun, P0rIHrc0urI, Kn0, 0nIsh, !bdn,
Abc0kuI nd Y0l, wIh cch hvng Irdng Il00r. Thc cxchngc sIrIcd
0pcrI0n wIh 0nly 9 sccurIcs (3 cquIcs nd b g0vcrnmcnI sI0cks). Thc
numbcr 0I sccurIcs Irdcd 0n Ihc Ngcrn SI0ck Exchngc s b0uI 300.
Thc NSE s g0vcrncd by Icm 0I shrch0ldcrs clccIcd I n Annul 0cncrl
MccIng. Thcsc shrch0ldcrs c0nsIIuIc Ihc g0vcrnng c0uncl (0rd) 0I Ihc
NSE. Thc C0uncl s hcdcd by PrcsdcnI (Chrmn) whlc Ihc NI0nl
SccrcIrI s lcd by 0rccI0r 0cncrl (00) (ChcI ExccuIvc 0IIccr) wh0 s
rcsp0nsblc I0r Ihc dyI0dy dmnsIrI0n 0I Ihc cxchngc.
Thc duIcs 0I Ihc C0uncl ncludc:
() P0lcy mkng,
(b) EnI0rcng dscplnc m0ng mcmbcrs,
(c) Mkng rulcs nd rcgulI0ns I0r dclng mcmbcrs,
(d) 0vng ppr0vls I0 qu0II0ns nd lsIng 0I sccurIcs,
(c) Pr0IccIng Ihc nIcrcsI 0I Ihc nvcsIng publc, nd
(I) !nvcsIgIng nd scIIlng dspuIcs nd c0mplnIs gnsI nd m0ng
mcmbcrs.
Thcrc rc Iw0 Iypcs 0I mcmbcrshp 0rdnry nd dclng. Thc
0rdnry mcmbcr s Ihc rcgsIcrcd mcmbcr 0I Ihc cxchngc. Thc
dclng mcmbcr s pcrs0n 0r n nsIIuI0n wh0 n ddI0n I0 bcng
n 0rdnry mcmbcr, s lccnscd by Ihc c0uncl I0 Irdc n sI0cks, shrcs
nd b0nds 0n "Thc Exchngc". Thc dclng mcmbcrs rc Iypclly Ihc
sI0ckbr0kcrs nd Ihc ssung h0uscs.
2b
Shrcs nd sI0ck cn 0nly bc b0ughI nd s0ld 0n Ihc Ngcrn
SI0ck Exchngc Ihr0ugh dclng mcmbcrs. Ngcrn SI0ck
Exchngc dclng mcmbcrs hvc Iw0 r0lcs (dul cpcIy):
() As mrkcI mkcrs 0r dclcrs Ihcy cn bc lkcncd I0
Irdcr n Ihc sIrccI mrkcI nd
(b) As sI0ckbr0kcrs Ihcy cI s gcnIs 0I Ihc publc wh0
wsh I0 buy 0r scll Ihr0ugh Ihc SI0ck Exchngc.
!n Ihcr r0lc s dclcrs, Ihcy crn nc0mc.
Thc r0lcs 0I ny rcc0gnscd sI0ck cxchngc mrkcI w0uld
ncludc Ihc I0ll0wng:
() Thc cxsIcncc 0I ny rcc0gnzcd sI0ck cxchngc gvcs
lqudIy I0 nvcsI0rs wh0 my wnI I0 scll Ihcr shrcs
I0r csh s nd whcn nccdcd. Ths s Is prncpl r0lc.
(b) Als0 nvcsI0rs w0uld hvc 0pp0rIunIcs I0 dvcrsIy
Ihcr p0rII0l0s 0I sccurIcs, I Ihcy wnI.
(c) ExsIcncc 0I Ihc cxchngc s vIl I0 Irms IhI wsh I0
rsc l0ngIcrm Inncc. !I cnhnccs Ihc succcss 0I Ihc
ncw ssuc.
(d) Thc bscncc 0I scc0ndry mrkcI IclIcs Icnds I0 mkc
Ihc rsng 0I l0ngIcrm Iunds vcry cxpcnsvc n Icrms
0I rcIurns dcmndcd by nvcsI0rs.
(c) Ec0n0mc dcvcl0pmcnI 0I nI0n my bc hndcrcd by
lck 0I csIblshcd scc0ndry cpIl mrkcI whch my
rcsulI n lck 0I l0ngIcrm nvcsImcnI Inncc.
(I) ExsIcncc 0I n 0IIclly rcc0gnscd sI0ck mrkcI wll
cnsurc IhI sccurIcs Irdcd n such mrkcIs d0 n0I 0nly
hvc csIblshcd prccs buI rc ls0 cIIccnIly prccd.
(g) Acc0unIblIy nd Irnsprcncy cn bc gurnIccd s
Ihcrc rc rulcs nd rcgulI0ns whch dclng mcmbcrs
musI bdc wIh n Ihc c0nducI 0I Ihcr IIrs.
(h) !nvcsI0rs rc dcquIcly pr0IccIcd s sccurIcs rc,
n0rmlly, pr0pcrly scrccncd bcI0rc Ihcy rc lsIcd 0n
Ihc SI0ck Exchngc.
2b2
() SI0ck Exchngc IrnscI0ns cn n0w Ikc plcc Ihr0ugh
c0mpuIcr, nIcrncI, Iclcph0nc, Ix nd rc n0 l0ngcr lmIcd I0
Ihc Irdng Il00rs 0I n cxchngc buldng.
Thc NSE mdc drmIc chngc I0 Is sysIcm 0I Irdng n sI0cks
nd shrcs whcn I nIr0duccd Ihc AuI0mIcd Trdng SysIcm (ATS)
cIrdng n Aprl 999. Pr0r I0 Ihs Imc, sysIcm kn0wn s cll
0vcr sysIcm ws n 0pcrI0n. Ths sysIcm nv0lvcd sh0uIng by br0kcrs
0n Ihc Il00r 0I "Thc Exchngc" I0 dcclrc Ihcr nIcnI0ns I0 buy 0r scll
sI0cks / shrcs.
Thc ncw sysIcm, IhI s clccIr0nc Irdng sysIcm, s c0mpuIcrscd
0nc undcr whch sI0ckbr0kcrs nIcrcI wIh 0nc n0Ihcr Ihr0ugh nIcr
c0nnccIcd w0rk sII0ns, IhI s cr0ss ncIw0rk 0I c0mpuIcrs. Thc
mn subsysIcms 0I Ihc uI0mIcd Irdng sysIcm (ATS) rc Ihc w0rk
sII0n (CPU, m0nI0r nd prnIcr), Ihc Irdng cngnc (Ihc scrvcr)
nd Ihc Irdng s0IIwrc (Ihc h0rz0n). Thc w0rksII0n s Ihc clccIr0nc
IclIy wIh whch Ihc br0kcrs nIcrcI nd cch w0rksII0n s
vlblc I0r cch br0kcr (prcscnIly) 0n Ihc Irdng Il00r 0I Ihc
cxchngc. Hcrc br0kcrs npuI Ihcr buy nd scll 0rdcrs 0n Ihcr
sysIcms. Thc Irdng cngnc s Ihc c0mpuIcr scrvcr whch gcncrIcs
Ihc cIul sIrI 0I Ihc dy's mrkcI IrnscI0ns (0pcn SIIc) nd
mIchcs br0kcrs buy/scll 0rdcr, I0ll0wcd by c0nInu0us Irdng. Ths
s d0nc bcI0rc ll0wng Ihc IrnscI0n, 0Ihcrwsc Ihc IrnscI0n s
rc|ccIcd.
AIIcr br0kcrs hvc npuI 0rdcrs, nI0 Ihcr ndvdul sysIcms, Ihc scrvcr
g0cs nI0 Ihc C0mpuIcr SccurIcs Clcrng SysIcm CSCS Clcrng H0usc
I0 vcrIy I Ihc cc0unI numbcrs cnIcrcd by Ihc br0kcrs cIully cxsI
nd I Ihc sI0cks rc vlblc n Ihc clcnIs' cc0unIs.
Trdng 0n Ihc ATS sIrIs usully I 0.00m cch Irdng dy wIh
Ihc Prc0pcn SIIc (sIuI0n whcn br0kcrs npuI Ihcr buy/scll 0rdcrs
whch rc ycI I0 bc mIchcd nd, IhcrcI0rc, sub|ccI I0 prIl 0r I0Il
vrI0ns). AI b0uI 0.40 m Irdng m0vcs I0 Ihc 0pcn/C0nInu0us
SIIc. AI 2 n00n Irdng m0vcs I0 Ihc cl0sc sIIc, IhI s, mrkcI
cl0scs. Thc ATS s c0nIgurcd I0r rcm0Ic Irdng. Alrcdy sI0ckbr0kcrs
n s0mc brnchcs rc Irdng 0n lnc. PrcscnIly, s0mc br0kcrs cnggc
n rcm0Ic Irdng Ir0m Ihcr dIIcrcnI 0IIccs.
2b3
wIh Ihc nIr0ducI0n 0I Ihc ATS (Thc h0rz0n) nd Ihc IghI c0uplng
n Fcb 2000 0I Ihc h0rz0n wIh Ihc CSCS (Thc EquI0r), Ihs pr0ccdurc
I00k 0n c0mplcIcly ncw I0rmI. uI IrsI, lcI us l00k I Ihc ccrIIcIc
pr0ccss I0r qu0Icd sccurIcs 0nly.
() Thc nvcsI0r ppr0chcs hs sI0ckbr0kcr, nd 0bIns Ihc
ppr0prIc I0rms:
() Shrc IrnsIcr I0rms, nd
() Shrch0ldcrs prIculrs I0rm CSCS R005 (lIcr dc
cmphsscd).
(b) Hc crcIully c0mplcIcs Ihcsc I0rms (Iypc wrIIcn 0r hnd wrIIcn
n bl0ck cpIls) nd sgns Ihc ppr0prIc plcc(s).
(c) Hc submIs hs ccrIIcIc nd Ihc c0mplcIcd I0rms I0 hs
sI0ckbr0kcrs.
(d) Thc sI0ckbr0kcr Ills Ihc ccrIIcIc dcp0sI I0rm, sgns Ihc
rclcvnI p0rI0n 0I Ihc c0mplcIcd ccrIIcIc, d0cumcnIs Ihcm
nd scnds Ihcm I0 Ihc ppr0prIc rcgsIrr I0r vcrIcI0n.
(c) AIIcr vcrIcI0n nd wIhn 48 h0urs, Ihc rcgsIrr scnds Ihc
d0cumcnIs drccIly I0 CSCS I0r IurIhcr pr0ccssng.
(I) Thc CSCS ssgns Clcrng H0usc Numbcr (CHN) I0 Ihc
shrch0ldcr.
(g) !I ls0 ssgns CSCS c0mpuIcrgcncrIcd cc0unI numbcr I0
Ihc shrch0ldcr.
whcrcs shrch0ldcr hs 0nly 0nc CHN rcgrdlcss 0I Ihc
numbcr 0I sI0ckbr0kcrs Ihr0ugh whch hc crrcs 0uI hs
nvcsImcnI cIvIcs, hc w0uld hvc 0nc cc0unI numbcr pcr
sI0ckbr0kcr.
(h) Thc CSCS pr0ccsscs Ihc d0cumcnI I0r Irdng wIhn 24 h0urs.
() !n lcu 0I Ihc ccrIIcIc, Ihc shrch0ldcr w0uld n0w hvc
sIIcmcnI 0I sI0ck p0sI0n s cvdcncc 0I hs sI0ck p0sI0n wIh
Ihc CSCS SysIcm. Hc gcIs Ihs sIIcmcnI Ircc cvcry qurIcr nd
cn ls0 0bIn I 0n spccl rcqucsI 0n pymcnI 0I N00.
2b4
(|) Hc cn usc Ihc sIIcmcnI s c0llIcrl I0r l0n Ir0m Ihc
bnk.
Thc H0rz0n s Ihc ATS s0IIwrc, IcsIcd sccurIcs Irdng s0luI0n
whch hs bccn uscd n mIurc nd cmcrgng sI0ck mrkcIs.
() Thc nvcsI0r nIIcs Ihc buy 0r scll 0rdcr, g0ng Ihr0ugh hs
sI0ckbr0kcr.
(b) Hc dcp0sIs hs m0ncy wIh hs sI0ckbr0kcr whcn hc s buyng,
0r dcp0sIs hs ccrIIcIc I0r vcrIcI0n whcn hc s scllng.
whcn hs ccrIIcIc hs bccn dcmIcrlscd (mm0blscd),
hc gvcs nsIrucI0n I0 hs sI0ckbr0kcr I0 scll Ir0m hs
shrch0ldng cc0unI n Ihc CSCS sysIcm.
(c) Hc c0mplcIcs Ihc ncccssry d0cumcnII0n ncludng IrnsIcr
I0rm.
(d) !n rcspccI 0I prIl slc, hc gvcs nsIrucI0n I0 hs sI0ckbr0kcr
I0 scll Ir0m Ihc sI0cks.
(c) Thc sI0ckbr0kcr rcccvcs nsIrucI0ns Ir0m hs clcnI nd Ills
Ihc ccrIIcIc 0I dcp0sI I0rm nd scnds Ihcm wIh Ihc shrc
ccrIIcIc, I ny, I0r vcrIcI0n I0 Ihc rcgsIrr.
(I) SI0ckbr0kcrs vcrIcs clcnIs' sgnIurcs wIh Ihc RcgsIrr.
(g) C0mplcIcs c0nIrcI n0Ic nd gvcs I I0 hs clcnI s cvdcncc
0I Ihc c0nIrcI.
(h) Thc rcgsIrr uIhcnIcIcs nvcsI0rs clms (ccrIIcIcs nd
IrnsIcr I0rm) s prcscnIcd Ihr0ugh Ihc sI0ckbr0kcr.
() Scnds vcrIcd ccrIIcIcs nd sgncd IrnsIcr I0rm nd C0 I0
Ihc CSCS wIhn 48 h0urs.
(|) CSCS ccrIIcs IhI Ihc shrcs rc n Is sysIcm nd IhI
sI0ckbr0kcrs cn Irdc n Ihc shrcs.
(k) TrnscI0n Ikcs plcc 0n Ihc cxchngc nd IrnsmIIcd I0
CSCS 0n rcl Imc bss v Ihc ATS.
(l) TrnscI0ns 0bIncd Ir0m Ihc Exchngc rc pr0ccsscd.
2b5
(m) SI0ck br0kcrs c0mmuncIc Ihcr dly Inncl c0mmImcnI
I0 cch 0Ihcr I0 Ihc scIIlcmcnI bnks (whcrc cch sI0ckbr0kcr
mnIns Irdng cc0unI) v dskcIIcs supp0rIcd by hrd
c0pcs.
!I sh0uld bc n0Icd IhI ll Ihc b0vc IrnscI0ns rc cxpccIcd
I0 bc c0mplcIcd wIhn 4 w0rkng dys, IhI s, T + 3
(IrnscI0n dy plus 3 w0rkng dys)
C0sIs n rcspccI 0I scc0ndry mrkcI IrnscI0ns ncludc grduIcd
br0kcr's c0mmss0n, \AT 0n Ihc c0mmss0n, sImp duIy, SEC Icc
(buycr 0nly) nd NSE / CSCS I0r (scllcr 0nly) br0kcrs' chrgcs cn,
h0wcvcr, bc ncg0IIcd wIhn rngc ppr0vcd by Ihc C0uncl 0I Ihc
cxchngc.
CurrcnIly, Ihcsc rc:
SI0ckbr0kcrs !nc0mc .25(0.75 I0 .5)
NSE Fccs* 0.50
CSCS* 0.45
SImp duIcs 0.08
\AT 0n c0mmss0ns 5
SI0ckbr0kcrs !nc0mc 0.75 I0 .50
SEC Fccs 0.b0
CSCS 0.0
SImp duIcs 0.075
\AT 0n c0mmss0ns 5
Thc 0vcrll sIrucIurc d0cs chngc 0vcr Imc dcpcndng 0n Ihc drccIvcs
Ir0m Ihc NSE 0r SEC.
()
C0nccpIully, Ihc m|0r IcI0r IhI nIlucnccs Ihc m0vcmcnI 0I
prcc 0I sccurIy n ny sI0ck mrkcI s dcmnd I0r nd Ihc
supply 0I Ihc shrcs 0I Ihc c0mpny. Ths wll bc rcIlccIcd n Ihc
undcrlyng IundmcnIls 0I Ihc c0mpny, such s, pr0IIblIy
nd dvdcnd Ircnd, crnngs pr0spccIs, IuIurc dvdcnd, gr0wIh
2bb
cIc. Ths cn bc c0mplcmcnIcd by 0Ihcr n0ncc0n0mc IcI0rs.
All Ihcsc IIccI nvcsI0rs' bscs whch rc c0nscqucnIly
rcIlccIcd n Ihcr rcspccIvc nsIrucI0ns I0 Ihcr vr0us
sI0ckbr0kcrs I0 buy 0r scll prIculr sccurIy.
Thc prcc m0vcmcnIs 0vcr Imc 0n Ihc NSE rc usully rcIlccIcd
Ihr0ugh Ihc NSE prcc ndcx.
(b)
Ths s Ihc ggrcgIc 0I Ihc mrkcI vlucs 0I ll sccurIcs lsIcd
0n Ihc cxchngc s I p0nI n Imc. !I s usully gvcn I Ihc
cl0sc 0I busncss cch Irdng dy.
(c)
Ths ndcx s n ggrcgIc 0I Ihc mrkcI cpIlsI0n 0I ll
Ihc ndusIrl cquIcs lsIcd 0n Ihc NSE nd cxprcsscd n Icrms
0I bsc mrkcI vluc (1n. 3 984 = 00). C0mpuIcd dly, I
s mcns 0I mcsurng Ihc cxIcnI nd drccI0n 0I Ihc gcncrl
prcc m0vcmcnI 0n Ihc NSE.
Thc NSE ndcx s gvcn by Ihc I0rmul:
00 x
\luc MrkcI sc
\luc MrkcI CurrcnI
.c
( )
( )
00 x
P
P
n
=
n n
n
=

= CurrcnI mrkcI prcc 0I n 0rdnry shrc

= CurrcnI numbcr 0I lsIcd 0rdnry shrc

P
n
= CurrcnI mrkcI prcc bsc dIc

n
= N0 0I lsIcd shrcs bsc dIc
= , 2... n
n = n0 0I c0nsIIucnIs n Ihc ndcx.
2b7
RcgsIcrcd s Plc RcgsIcrcd s Plc.
Submss0n I0 cxchngc 5 ycr
Inncl sIIcmcnIs
Submss0n I0 Ihc cxchngc 3 ycr
Fnncl SIIcmcnIs.
0Ic 0I lsI udIcd cc0unIs musI n0I
bc m0rc Ihn 9 m0nIhs
0Ic 0I lsI udIcd cc0unIs musI n0I
bc m0rc Ihn 9 m0nIhs.
Am0unI IhI cn bc rscd n Ihc
cpIl mrkcI unlmIcd
Am0unI IhI cn bc rscd my n0I
cxcccd N30 mll0n.
Annul qu0II0n Iccs bscd 0n mrkcI
cpIlsI0n
Annul qu0II0n Iccs s IlI nnul
chrgc 0I N30,000.
AI lcsI 25 0I shrc cpIl musI bc
0IIcrcd I0 Ihc publc
AI lcsI 0 0I shrc cpIl musI bc
0IIcrcd I0 Ihc publc.
N0. 0I shrch0ldcrs musI n0I bc lcss
Ihn 300
N0. 0I shrch0ldcrs musI n0I bc lcss
Ihn 00.
AIIcr lsIng, c0mpny musI submI
qurIcrly, hlIycrly nd nnul
cc0unIs.
AIIcr lsIng, c0mpny, musI submI
qurIcrly hlIycrly nd nnul
cc0unIs
20.2.9
()
Thc dvnIgcs 0I lsIng ncludc:
() LqudIy: Ihc cxchngc pr0vdcs lqudIy I0r nvcsI0rs,
() Kn0wn prccs: prccs rc kn0wn nd cvcn dccmcd rghI
n n cIIccnI mrkcI,
() AddI0nl cpIl: pr0vdcs vcnuc I0r rsng
ddI0nl cpIl,
(v) PublcIy: gvcs ncrcscd publcIy I0r Ihc c0mpny,
(v) C0llIcrl: cnhnccs Ihc vluc 0I sccurIy gvcn s
c0llIcrl I0r l0ns,
(v) MrkcIblIy: ncrcscs Ihc mrkcIblIy 0I shrcs nd
sI0cks, nd
2b8
(v) Shrc prcc: pr0vdcs mpr0vcmcnI n shrc prcc duc
I0 cIIccnI 0rgnsI0nl sIrucIurc.
(b)
Thc dsdvnIgcs 0I lsIng ncludc:
() Hgh c0sIs 0I 0bInng qu0II0n: c0sI 0I pr0spccIus,
Iccs pyblc I0 bnkcrs nd br0kcrs,
() C0sIs 0I mnInng qu0II0n: mngcmcnI Imc nd
cII0rIs, sIrngcnI rcp0rIng rcqurcmcnIs, nd
() Hghly dcmndng nd rg0r0us rulcs.
Thc CSCS LId s subsdry 0I Ihc Ngcrn SI0ck Exchngc (NSE)
csIblshcd I0 pr0vdc, ccnIrl dcp0sI0ry I0r shrc ccrIIcIcs 0I
c0mpncs qu0Icd 0n Ihc NSE, clcrng nd scIIlcmcnI I0r ll sI0ck
mrkcI IrnscI0ns.
!I ls0 ssucs CcnIrl SccurIcs !dcnIIcI0n Numbcrs (CS!N) I0
shrch0ldcrs nd pr0vdcs sIckccpng nd cusI0dn scrvccs n
c0n|uncI0n wIh cusI0dn mcmbcrs, I0r b0Ih l0cl nd I0rcgn
nsIrumcnIs.
!n ddI0n, Ihc CSCS scrvcs s subrcgsIry I0r ll sccurIcs
mnIncd n c0n|uncI0n wIh Ihc rcgsIrr 0I qu0Icd c0mpncs.
()
Thc sIcps nv0lvcd n Ihc clcrng nd scIIlcmcnI sysIcm 0I
Ihc CSCS rc:
() 0pcnng 0I cc0unI usng nI0rmI0n n Ihc
shrch0ldcr's IrnsIcr I0rm.
() RcccpI 0I IrnscI0ns 0n lnc, rcl Imc, v Ihc ATS 0I
Ihc NSE (H0rz0n).
() 0spIch by scIIlcmcnI bnks, 0I schcdulc 0I blnccs
0n Irdng cc0unIs I0 CSCS LmIcd.
(v) Pr0ccssng 0I IrnscI0ns 0bIncd Ir0m Ihc cxchngc.
(v) Trnsmss0n 0n dly bss, nI0rmI0n rcgrdng
sI0ckbr0kcrs Inncl c0mmImcnIs I0 Ihc scIIlcmcnI
bnks Ihr0ugh dskcIIcs supp0rIcd by hrd c0pcs.
2b9
(v) TrnsIcr by scIIlcmcnI bnks 0I Ihc ncccssry dcbI nd/
0r crcdI cnIrcs (clccIr0nclly) I0 Ihc rcspccIvc br0kcrs
Irdng cc0unI usng Ihc CSCS schcdulc.
(v) SI0ck scIIlcmcnI by scIIlcmcnI bnks 0n dy T + 3
Ihcrcby chcvng 0clvcry \crsus PymcnI (0\P).
CpIl mrkcIs rc sd I0 bc cIIccnI whcn prccs 0I sccurIcs n
such mrkcIs Iully rcIlccI ll nI0rmI0n b0uI Ihc c0mpny, Ihc
ndusIry I0 whch I bcl0ngs nd Ihc cc0n0my s wh0lc. Ths mcns
IhI ny ncw nI0rmI0n b0uI c0mpny c0mng nI0 Ihc mrkcI
s mmcdIcly rcIlccIcd n Ihc prcc 0I Ihc shrc 0I Ihc c0mpny
such IhI n0 nvcsI0r cn mkc n b0vc vcrgc rcIurn 0n n
nvcsImcnI. Ths s bccusc n supp0scdly cIIccnI mrkcI, Ihc
prcc 0I sccurIy s cxpccIcd I0 IlucIuIc rnd0mly r0und Is Iruc
0r nIrnsc vluc.
!I sh0uld bc n0Icd IhI cIIccnI mrkcI d0cs n0I mcn 'pcrIccI'
mrkcI, lIh0ugh, b0Ih mrkcIs shrc c0mm0n chrcIcrsIcs.
'EIIccnI' smply mcns sccurIy s prcc cIIccnI. Thc prcc s rghI
nd rcprcscnIs Ihc bcsI csImIc 0I Ihc sccurIy's Iruc vluc bscd
0n Ihc vlblc nI0rmI0n. Ths s Ihc bss 0I cpIl mrkcI
cIIccncy.
Hrry Mrk0wIz sscrIcd IhI mrkcI cIIccncy sh0uld bc
dscusscd undcr Ihrcc hcdngs Ihc wck I0rm, Ihc scmsIr0ng
I0rm nd Ihc sIr0ng I0rm.
Ths I0rm 0I cIIccncy mplcs IhI nI0rmI0n b0uI psI shrc
prcc m0vcmcnIs s lrcdy rcIlccIcd n Ihc currcnI mrkcI prcc.
ThcrcI0rc Ihc blIy I0 I0rccsI IuIurc prccs cnn0I bc cnhnccd
bscd 0n Ihc usc 0I psI nI0rmI0n l0nc.
Ths I0rm sIIcs IhI Ihc currcnI mrkcI prcc 0I sccurIy, Iully
nd mmcdIcly rcIlccIs ll publcly vlblc nI0rmI0n
ncludng nI0rmI0n Ir0m Inncl sIIcmcnIs, chrmn's
rcp0rI nd ncws Icms. Hcrc nsdcr nI0rmI0n s cxcludcd.
270
Ths I0rm 0I cIIccncy mplcs IhI ALL nI0rmI0n b0Ih publc
nd prvIc (ncludng nsdcr nI0rmI0n) s Iully nd
mmcdIcly rcIlccIcd n Ihc currcnI mrkcI prcc 0I Ihc sccurIy.
!nsdcr nI0rmI0n s sd I0 bc nI0rmI0n IhI s kn0wn I0
mngcmcnI buI unkn0wn I0 Ihc publc.
!I sh0uld bc n0Icd IhI Ihc b0vc lcvcls 0I cIIccncy rc n sccndng
0rdcr, IhI s, mrkcI IhI s sIr0ngI0rm cIIccnI musI ls0 bc
scmsIr0ng nd wckI0rm cIIccnI.
AsscrI0ns rclIng I0 cpIl mrkcI cIIccncy rc n0I drccIly
IcsIblc. H0w cn IcsIs bc crrcd 0uI 0n whcIhcr ll vlblc
nI0rmI0n s Iully rcIlccIcd n prccs 0I sccurIcs! 00cs Ihc
rcscrchcr pcrs0nlly hvc ll Ihc vlblc nI0rmI0n! 00cs hc
cvcn kn0w IhI s0mc 0I Ihs nI0rmI0n cxsIs!
ThcrcI0rc, Ihc 0nly IcsIs IhI c0uld p0ssbly bc crrcd 0uI rc whcIhcr
0r n0I prccs 0I sccurIcs bchvc n wy IhI ppcrs c0nssIcnI
wIh cIIccncy. Such IcsIs whch hvc bccn crrcd 0uI n mIurc
cpIl mrkcIs hvc IIcmpIcd I0 d0 Ihs. Thc cxp0sI0n s, h0wcvcr,
bcy0nd Ihc sc0pc 0I Ihs pck.
Thc mplcI0ns 0I Ihc cIIccncy 0I Ihc cpIl mrkcIs n gcncrl,
nd IhI 0I Ihc sI0ck mrkcI n prIculr wll bc cxplncd Ir0m Ihc
p0nIs 0I vcw 0I:
() !nvcsI0rs, nd
() Fnncl mngcrs.
()
Thc mplcI0n s IhI nvcsI0rs sh0uld n0I wsIc Ihcr
Imc l00kng I0r sccurIy IhI w0uld pr0vdc rcIurns
n cxccss 0I Ihc n0rml 0r cxpccIcd rcIurns smply by
nlysng psI nI0rmI0n 0n Ihc drccI0n 0I shrc
prcc 0r by nlysng ncw cc0n0mc nI0rmI0n b0uI
Ihc sccurIy 0r Ihc c0mpny. !I s 0nly whcn n nvcsI0r
hs cccss I0 nI0rmI0n whch hs n0I c0mc I0 Ihc
kn0wlcdgc 0I Ihc nvcsIng publc I lrgc IhI n b0vc
vcrgc rcIurn cn bc mdc.
27
(b)
Thc mplcI0ns I0r Inncl mngcrs rc cxIrcmcly
mp0rInI nd undcrsc0rc Ihc kcy rcs0n I0r Ihc
dscuss0n 0I cpIl mrkcIs cIIccncy n Ihc IrsI
nsIncc. Thc mplcI0ns b0rdcr 0n Ihc I0ll0wng:
() RI0nl nvcsI0rs cn sIuIcly nIcrprcI Ihc
cIvIcs 0I c0mpny's mngcmcnI nd cnn0I
bc dcccvcd by mcrc wnd0w drcssng IhI hs
Ihc cIIccI 0I unncccssrly ncrcsng Ihc prcc 0I
shrc.
() Fnncl mngcrs wll bc wsIng Ihcr Imc
wIng I0r rcc0vcry 0I Ihc prcc 0I Ihc sccurIy
n dcprcsscd mrkcI bcI0rc Ihcy c0mc 0uI wIh
ncw ssucs. !I Ihc mrkcI s cIIccnI nd sccurIy
prccs cmcrgc n rnd0m Ish0n, Ihcrc s n0
rcs0n I0 bclcvc IhI |usI bccusc Ihcy wcrc hgh
n Ihc psI, Ihcy wll m0vc bck I0 Ihc 0ld lcvcls.
() Fnncl mngcrs sh0uld bc prcprcd I0
lwys rclcsc nI0rmI0n b0uI Ihcr cIvIcs
I0 Ihc mrkcI s ny such nI0rmI0n,
prIculrly Ihc p0sIvc 0nc, wll mmcdIcly
bc nc0rp0rIcd nI0 Ihc shrc prcc nd rcsulI n
n upwrd prcc m0vcmcnI I0r Ihc bcncII 0I Ihc
shrch0ldcrs.
(v) Fnncl mngcrs my n0I wnI I0 rclcsc
ncgIvc nI0rmI0n bccusc such nI0rmI0n
mghI dvcrscly IIccI Ihcm ( sIr0ngI0rm
ncIIccncy). !I s d0ubIIul whcIhcr Ihs c0uld bc
susIncd 0vcr l0ng Icrm sncc, s00ncr 0r lIcr,
m0sI nI0rmI0n lck I0 Ihc mrkcI. M0rc0vcr, I
nvcsI0rs hppcn I0 kn0w IhI mngcrs d0
supprcss ncgIvc nI0rmI0n, Ihcy my bc
unIv0urbly dsp0scd I0 such mngcrs.
(v) !nvcsI0rs n Ihc sI0ck mrkcI rc vcry rI0nl
whcn Ihcy puI vlucs 0n rsky Inncl sscIs.
Thcy, I0r nsIncc, lwys scrch I0r smlr
sscIs (n Icrms 0I rsk nd rcIurn) nd usc Ihcr
prccs I0 cr0ss chcck Ihc prIculr sscI IhI s
bcng vlucd. !n 0Ihcr w0rds, bccusc 0I Ihcr
rI0nl bchv0ur, Ihcy cnn0I bc I00lcd. y nd
272
lrgc Ihc mp0rI 0I mrkcI cIIccncy I0r Ihc
mngcmcnI s IhI Inncl mngcrs rc
drccIly lnkcd wIh nvcsI0rs Ihr0ugh prccs 0I
sccurIcs nd IhI prccs d0 rcsp0nd spccdly
nd rI0nlly I0 ncw nI0rmI0n.
!I w0uld bc 0bscrvcd Ir0m Ihc b0vc dscuss0n 0I mrkcI cIIccncy IhI
mrkcI ncIIccncy w0uld mply IhI nvcsI0rs cn mkc b0vc vcrgc
rcIurns by cxpl0Ing Ihc mrkcI wIh such ncIIccncy. !I Ihs s Ihc yrdsIck
I0r mcsurng Ihc cIIccncy 0r 0Ihcrwsc 0I sI0ck mrkcI, I c0uld bc sd
IhI Ihc Ngcrn cpIl mrkcIs IypIy scmsIr0ng I0rm 0I mrkcI
cIIccncy. S0mc cmprcl cvcnIs ppcr I0 supp0rI Ihs vcw. 0nc sngulr
mp0rInI 0bscrvcd cvcnI ws Ihc wy prccs 0n Ihc Ngcrn SI0ck MrkcI
sIr0n0mclly r0sc Ir0m crly 2008 0nly I0 n0scdvc, I0 Ihcr prcscnI (2009)
l0w prccs. !I ws cvdcnI IhI Ihc shrp ncrcscs n prccs wcrc n0I supp0rIcd
by ny IundmcnIls 0I Ihc c0unIry's qu0Icd c0mpncs. Thcy wcrc mcrcly
drvcn by uncc0n0mc cvcnIs.
Thc scc0ndry mrkcI s mrkcI I0r cxsIng sccurIcs. Thc bckb0nc 0I
Ihc scc0ndry mrkcI (Ihc sI0ck mrkcI) s Ihc Ngcrn SI0ck Exchngc
(NSE).
Thc NSE ws nc0rp0rIcd n 9b0 s n0II0rpr0II 0rgnsI0n ( c0mpny
lmIcd by gurnIcc) nd sIrIcd 0pcrI0ns n 9b. Thcrc rc Iw0 m|0r
Iypcs 0I mcmbcrshp Ihc 0rdnry mcmbcr nd Ihc dclng mcmbcr. Thc
dclng mcmbcr s Ihc sI0ckbr0kcr. SI0ckbr0kcrs buy nd scll sI0cks nd
shrcs s gcnIs 0I nvcsI0rs.
Thc NSE (lkc ny 0Ihcr sI0ck cxchngc) plys n mp0rInI r0lc n Ihc
scc0ndry mrkcI. Thc sngulr m0sI mp0rInI IuncI0n s IhI 0I lqudIy
I0r nvcsI0rs. !I hs 0Ihcr mp0rInI IuncI0ns ncludng IclIIng Ihc
Irdng n Ihc ncw ssucs mrkcI.
Thc Irdng mcchnsm s cIrdng, c0mpuIcrbscd Irdng sysIcm whch
l0ng wIh Is CSCS c0unIcrprI cclcrng nd scIIlcmcnI pr0ccss, cnsurcs
c0mplcI0n 0I shrcs nd sI0cks IrnscI0ns wIhn 4 w0rkng dys (T+3
dys) .c. TrnscI0n dy + 3 w0rkng dys.
Thc Ngcrn SI0ck Exchngc hs Iw0 m|0r sccI0rs Ihc IrsIIcr sccI0r nd
Ihc cmcrgng mrkcIs (I0rmcrly scc0ndIcr) sccI0r.
273
Thc dIIcrcnccs bcIwccn Ihc Iw0 sccI0rs ccnIrc 0n Ihc m0unI IhI cn bc
rscd n Ihc ncw ssuc mrkcI, submss0n 0I Inncl sIIcmcnIs, udIcd
cc0unIs nd 0Ihcrs.
LsIng 0n Ihc SI0ck Exchngc hs dvnIgcs nd dsdvnIgcs. !Is
dvnIgcs, h0wcvcr, 0uIwcgh Is dsdvnIgcs
Thc SI0ck MrkcI cIIccncy mplcs cIIccncy 0I Ihc prcc I whch sccurIcs
rc b0ughI nd s0ld 0n Ihc sI0ck mrkcI. Prccs rc sd I0 rcIlccI Ihrcc I0rms
0I cIIccncy Ihc wck I0rm, Ihc scm sIr0ng I0rm nd Ihc sIr0ng I0rm. Thc
Ngcrn SI0ck Exchngc bcl0ngs I0 Ihc cmcrgng mrkcIs gr0up. Thc Ihnkng
n Ihc Ngcrn CpIl MrkcIs s IhI I bcl0ngs I0 Ihc scmsIr0ng cIcg0ry.
20.b.
. whch 0I Ihc I0ll0wng s r0lc 0I Ihc Ngcrn SI0ck Exchngc (NSE)!
A ExsIcncc pr0vdcs lqudIy I0r nvcsI0rs
ExsIcncc gvcs nvcsI0rs 0pp0rIunIy I0 dvcrsIy Ihcr p0rII0l0s
0I sccurIcs.
C ExsIcncc pr0vdcs 0pp0rIunIy I0r c0mpncs IhI wnI I0 rsc
l0ngIcrm cpIl.
0 0cIcrmncs prccs 0n Ihc sI0ck mrkcI
E Enhnccs mrkcIblIy 0I ncw ssucs.
2. whch 0I Ihc I0ll0wng s c0rrccI wIh rcspccI I0 Ihc hsI0rcl csIblshmcnI
0I Ihc Ngcrn SI0ck Exchngc (NSE)!
A EsIblshcd n 950 nd sIrIcd busncss n 955
EsIblshcd n 9b4 nd sIrIcd busncss n 9b5
C EsIblshcd n 9b0 nd sIrIcd busncss n 9b
0 EsIblshcd n 970 nd sIrIcd busncss n 97
E EsIblshcd n 9bb nd sIrIcd busncss n 9b7
3. whch 0I Ihc I0ll0wng s N0T Iruc b0uI Ihc 0pcrI0ns 0I Ihc Ngcrn
SI0ck Exchngc!
A !I prcscnIly 0pcrIcs 'cll 0vcr' sysIcm 0I Irdng
Thc Exchngc currcnIly 0pcrIcs AuI0mIcd Trdng SysIcm
(ETrdng)
274
C Trdng usully sIrIs I 0.00 m nd cnds 2.00 n00n cch
dy.
0 SI0ckbr0kcrs Irdc 0n Ihc 'Il00r' 0I Ihc Exchngc s wcll s Ir0m
Ihcr 0IIccs.
E Thc AuI0mIcd Trdng SysIcm (ATS) S0IIwrc s kn0wn s Ihc
H0rz0n
4. whch 0I Ihc I0ll0wng s Ihc C0RRECT rcqurcmcnI I0r lsIng 0n Ihc
Emcrgng MrkcI SccI0r (I0rmcrly Scc0ndTcr MrkcI) 0I Ihc Ngcrn
SI0ck Exchngc!
A Submss0n 0I 5 ycrs Inncl sIIcmcnIs
Am0unI IhI cn bc rscd s unlmIcd
C Annul qu0II0n Iccs s IlI nnul chrgc.
0 AI lcsI 25 0I shrc cpIl musI bc 0IIcrcd I0 Ihc publc
E Numbcr 0I shrch0ldcrs musI n0I bc lcss Ihn 300.
5. EIIccnI CpIl MrkcI mcns
A PcrIccI cpIl mrkcIs
!mpcrIccI cpIl mrkcIs
C 0pIml prcng 0I sccurIcs by Ihc mrkcI
0 000d nd blnccd cpIl mrkcIs
E Esly cccssblc cpIl mrkcIs
20.b.2
. whI s Ihc nmc gvcn I0 Ihc syIcm by whch shrch0ldcrs, undcr Ihc
ncw clcrng nd scIIlcmcnI sysIcm, cxchngc Ihcr ccrIIcIcs I0r
cc0unIs wIh Ihc CSCS!
2. H0w d0cs n nvcsI0r buy 0r scll sccurIcs 0n Ihc sI0ck cxchngc!
3. whI rc Ihc mn IuncI0ns 0I RcgsIrrs undcr Ihc ncw ETrdng
SysIcm!
4. wIhn h0w mny dys musI buy nd scll IrnscI0ns bc sIrIcd nd
c0mplcIcd undcr ETrdng SysIcm!
5. whI s Ihc mn dsdvnIgc 0I lsIng shrcs 0n Ihc SI0ck Exchngc!
275
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ 0cInc Ihc rsk nd rcIurn 0I sccurIy,
+ 0cInc nd clculIc Ihc cxpccIcd rcIurn nd rsk 0I sccurIy,
+ Expln nvcsI0rs IIIudc I0 rsk,
+ Expln p0rII0l0 n Ihc c0nIcxI 0I sccurIcs,
+ ClculIc Ihc cxpccIcd rcIurn nd rsk 0I p0rII0l0 usng p0rII0l0 Ihc0ry,
+ 0cIcrmnc nvcsI0rs 0pIml p0rII0l0 0I sccurIcs usng p0rII0l0 Ihc0ry,
+ UndcrsInd Ihc c0nccpIs 0I 'dvcrsIcI0n' "nvc dvcrsIcI0n" nd "supcrIlu0us
dvcrsIcI0n" nd Ihcr mplcI0ns I0r p0rII0l0 rsk rcducI0n,
+ UndcrsInd Ihc c0nccpI 0I CpIlAsscI Prcng M0dcl (CAPM),
+ 0IIcrcnIIc bcIwccn SysIcmIc nd unsysIcmIc rsks nd gvc cxmplcs 0I
cch,
+ UndcrsInd Ihc usc 0I CAPM n dcIcrmnng Ihc cxpccIcd rcIurn 0I sccurIy,
+ Expln Ihc c0nccpI 0I bcI ( | ) s mcsurc 0I rsk nd Is mplcI0n I0r
nvcsI0rs n sI0ck mrkcI sccurIcs,
+ ClculIc Ihc cxpccIcd rcIurn nd rsk 0I sccurIy usng Ihc CAPM m0dcl,
+ SIIc nd cxpln Ihc p0lccs/sIrIcgcs n0rmlly I0ll0wcd n p0rII0l0
mngcmcnI, nd
+ UndcrsInd Ihc Iw0 mn mcIh0ds 0I P0rII0l0 pcrI0rmncc mcsurcmcnI.
Fnncl mngcrs sh0uld bc nIcrcsIcd n h0w sccurIcs 0n Ihc sI0ck mrkcI
rc prccd by nvcsI0rs, n Icrms 0I rcIurns rcqurcd 0n Ih0sc sccurIcs nd
Ihc unccrInIy (rsk) IIchcd I0 Ihc chcvblIy 0I Ih0sc rcIurns. Thc
rcs0ns rc:
27b
() Thc wy sccurIcs rc prccd by Ihc mrkcI gvcs s0mc nsghI nI0
h0w Ihc prccs 0I ncw sccurIcs 0I c0mpny rc scI n Ihc ncw ssucs
mrkcI.
(b) Thcrc s sIr0ng rclI0nshp bcIwccn nvcsImcnI dccs0ns 0I sccurIy
nvcsI0rs nd Ih0sc 0I Ihc Inncl mngcrs IhI Iypclly nvcsI n
Ixcd sscIs. !nvcsImcnIs n Ixcd sscIs rc mdc 0n Ihc bss 0I
cxpccIcd rcIurns 0I pr0|ccI nd Ihc rsk IIchng I0 Ih0sc rcIurns.
!nvcsI0rs n supp0scdly 0IIcl mrkcI ls0 scI prccs I0r sccurIcs
0n Ihc bss 0I rcIurn nd rsk 0I Ihc sccurIy.
(c) Sncc I s Ihc nvcsI0rs IhI pr0vdc Ihc Iunds I0r Ihcr plnncd pr0|ccIs,
Inncl mngcrs nccd I0 undcrsInd Ihc wy Ihcsc nvcsI0rs prcc
Ihcr sccurIcs. Ths nccd bcc0mcs m0rc mp0rInI I I s rclzcd
IhI mngcrs scck I0 mxmsc Ihc wclIh 0I Ihc c0mpny's
shrch0ldcrs.
Hvng pr0vdcd bss I0r Ihc sIudy 0I p0rII0l0 mngcmcnI, I s ncccssry,
I0 kn0w whI Ihc I0pc s b0uI. P0rII0l0 mngcmcnI n Is nrr0wcr scnsc
dcls wIh plnnng 0I n cIIccnI p0rII0l0 0I sccurIcs, IhI s, c0mbnI0n
0I sccurIcs whch, cc0rdng I0 Mrk0wIz, gvcs n nvcsI0r Ihc hghcsI
rcIurn I0r gvcn lcvcl 0I rsk 0r lIcrnIvcly Ihc l0wcsI lcvcl 0I rsk I0r
gvcn rcIurn.
!n Is wdcr scnsc p0rII0l0 mngcmcnI nv0lvcs scIIng 0I nvcsImcnI
0b|ccIvcs, spccIyng m|0r p0lccs nd, bscd 0n prIculr p0lcy,
dcsgnng spccIc sIrIcgcs I0 I0ll0w. !I ls0 ncludcs mcsurng Ihc
pcrI0rmncc 0I Ihc p0rII0l0 n rclI0n I0 Ihc 0b|ccIvc(s) scI.
!n p0rII0l0 mngcmcnI, nvcsI0rs mkc usc 0I Ihc I0ll0wng Inncl
Ihc0rcs nd m0dcls
() Thc IrdI0nl Ihc0ry,
(b) Thc p0rII0l0 Ihc0ry (Mrk0wIz m0dcl),
(c) CpIl AsscI Prcng M0dcl (CAPM),
(d) ArbIrgc Prcng M0dcl (APM),
(c) FundmcnIl Anlyss,
(I) Tcchncl Anlyss,
(g) Rnd0mwlk Thc0ry (RwT), nd
(h) EIIccnI MrkcI Hyp0Ihcss (EMH).
277
S0mc rc Icchnqucs I0r rcducng Ihc rsk 0I p0rII0l0 whlc 0Ihcrs rc
sIrIcgcs I0r sclccIng sccurIcs nI0 p0rII0l0. !n ddI0n Ihcrc rc p0rII0l0
pcrI0rmncc mcsurcs such s:
() M0ncy wcghIcd RIc 0I RcIurn (MwR0R), nd
(b) TmcwcghIcd RIc 0I RcIurn (TwR0R).
H0wcvcr, Ihcrc s nccd I0 undcrsInd, IrsI, h0w cxpccIcd rcIurn nd rsk 0I
snglc sccurIy rc mcsurcd, I0r pr0pcr undcrsIndng 0I p0rII0l0 plnnng
nd rcvcw.
Thcsc rc Ihc Iw0 m0sI mp0rInI c0mp0ncnIs 0I ny sccurIy. !n IcI Ihc
bss I0r ny sccurIy nvcsImcnI dccs0n s Ihc nlyss 0I Is rskrcIurn
rclI0nshp.
()
Ths s, I0r qu0Icd shrc, Ihc sum 0I dvdcnds rcccvcd nd cpIl
pprccI0n durng Ihc h0ldng pcr0d. !I s cxprcsscd n pcrccnIgc
Icrms s:
R =
( )

P
P P 0
0
0
+
whcrc
s Ihc rcIurn 0I Ihc sccurIy
s Ihc dvdcnd pymcnIs durng Ihc h0ldng pcr0d
s Ihc mrkcI prcc 0I Ihc shrc I Ihc cnd 0I Ihc h0ldng pcr0d
s Ihc mrkcI prcc I Ihc bcgnnng.
Thc rcIurn s kn0wn s H0ldng Pcr0d RcIurn (HPR). Thc h0ldng pcr0d
ssumcd by Ihc I0rmul s 0nc ycr 0r lcss. Thc h0ldng pcr0d rcIurn
my bc hsI0rcl 0r, whcrc rsk s gn0rcd, nIcpIcd.
(b)
Ths s Ihc lkclh00d IhI Ihc cIul rcIurn 0I sccurIy wll bc dIIcrcnI
Ir0m Ihc rcIurn bcng cxpccIcd. Trcsury bll, I0r cxmplc, s rsk
Ircc sccurIy bccusc I s ccrIn Is rcIurn wll c0mc, bcng
g0vcrnmcnI sh0rIIcrm sccurIy. H0wcvcr Ihc cxpccIcd rcIurn 0n shrc
my 0r my n0I c0mc nd I I c0mcs, I my bc l0wcr Ihn Ihc
nIcpIcd rcIurn. A shrc n Ihs scnsc s rsky sccurIy. Thc rskcr
278
Ihc shrc, Ihc m0rc lkcly IhI Ihc nIcpIcd rcIurn wll n0I bc
chcvcd.
!nvcsImcnI dccs0ns rc mdc n n unccrIn cnvr0nmcnI. Hcrc, I s rngc
0I rcIurns IhI mIIcrs nd n0I 0nc pcr0d rcIurn. Thcrc s nccd, IhcrcI0rc, I0
mkc usc 0I pr0bblIy dsIrbuI0n 0I rcIurns nd Ihc unccrInIy
surr0undng Ihc cIul rcIurn IhI wll bc chcvcd.
()
Ths s Ihc mcn 0r vcrgc 0I ll p0ssblc rcIurns wcghIcd by Ihcr
pr0bblIcs. !I cn bc cxprcsscd s:
E(R) = P

+ P
2
R
2
+ P
3
R
3
.. P
n
R
n
whcrc
E(R) s Ihc cxpccIcd rcIurn
R

( = , 2...n) s p0ssblc rcIurn

P

( = , 2,..n) s p0ssblc pr0bblIy IhI Ihs rcIurn wll bc
chcvcd
AlIcrnIvcly I my bc gcncrlly cxprcsscd s:
E(R) =
=
n


sgn summI0n Ihc s whcrc R P
(b)
A vcry mp0rInI mcsurc 0I rsk 0I sccurIy s Ihc SIndrd dcvI0n
(S0). Thc S0 s mcsurc 0I I0Il dspcrs0n nd IhcrcI0rc 0I Ihc I0Il
rsk 0I sccurIy. Thc rcs0n I0r Ihc usc 0I S0 s IhI Ihc dsIrbuI0n
0I rcIurns 0I sccurIy ppcrs I0 c0nI0rm I0 n0rml (symmcIrc)
dsIrbuI0n.
Thc S0 s Ihc squrc r00I 0I Ihc vrncc. Thc vrncc s Ihc sum 0I
Ihc squrcs 0I Ihc dcvI0ns Ir0m Ihc mcn rcIurn wcghIcd by Ihcr
pr0bblIcs.
279
7
kcturn(X)
P
r
c
b

b
i
l
i
t
y

c
l

0
c
c
u
r
r
c
n
c
c

(
P
i
k
i
)
whcn dsIrbuI0n 0I ll p0ssblc 0uIc0mcs 0I n cvcnI 0ccurs n
rnd0m Ish0n, nd Ihc dsIrbuI0n b0vc Ihc cxpccIcd vluc s
rcplcI0n 0I Ihc dsIrbuI0n bcl0w Ihc cxpccIcd vluc, Ihc dsIrbuI0n
s sd I0 bc n0rml 0r symmcIrc s gnsI bcng skcwcd 0r
symmcIrc. !n Ihs csc ny mcsurc 0I d0wnsdc rsk wll bc cqul
I0 Ihc mcsurc 0I I0Il dspcrs0n b0uI Ihc cxpccIcd vluc.
(c)
whcrc dccs0n hs I0 bc Ikcn 0n lIcrnIvc sccurIcs (I lcsI
Iw0), Ihcrc s nccd I0 clculIc IurIhcr vrblcIhc c0cIIccnI 0I
vrI0n bccusc Ihc S.0. n Is bs0luIc I0rm my bc mslcdng I
uscd. Thc c0cIIccnI 0I vrI0n 0I sccurIy s smply Is sIndrd
dcvI0n dvdcd by Is cxpccIcd rcIurn |S0/(ER)|. Thc C\ s mcsurc
0I rclIvc dspcrs0n mcsurc 0I rsk pcr unI 0I cxpccIcd rcIurn.
Mr. Rchrd Chukwu plns I0 nvcsI N0,000 n c0mpny X I Ihc bcgnnng
0I Ihc ycr. AI Ihc cnd 0I Ihc ycr Ihc p0ssblc vlucs my bc N0,400 0r
N0,b00 0r N0,800 0r N,000. Thcsc rc ll p0ssblc 0uIc0mcs. Thcr
pr0bblIcs rcspccIvcly rc 0.2, 0.3, 0.3, 0.2. ClculIc Ihc cxpccIcd rcIurn,
I0Il rsk nd Ihc rclIvc rsk 0I Ihc sccurIy. !gn0rc Ix
280
Mr. Rchrd Chukwu !nvcsImcnI n c0mpny X's shrc
N
0,400 4 0.2
0,b00 b 0.3
0,800 8 0.3
,000 0 0.2
E(R) = R

+ R
2
P
2
+ R
3
P
3
+ R
4
P
4
= (4 X 0.2) + (b X 0.3) + (8 X 0.3) + (0 X 0.2)
= 0.07 0r 7
T0Il Rsk (S0).
R

E(R)R

(E(R)R

)2
!
P
4 3 9 0.2 .8
b 0.3 0.3
8 0.3 0.3
0 3 9 0.2 .8
S.d =
2 . 4
RclIvc Rsk (C0cIIccnI 0I \rI0n)
cv = S0/E(R)
= 2./0.07
Thc c0mbnI0n 0I mcn (0r cxpccIcd) rcIurn nd sIndrd dcvI0n hclps
n nvcsI0r I0 dcquIcly cvluIc sccurIy s0 s I0 kn0w whcIhcr Ihc
sccurIy gvcs cn0ugh rcIurn I0r Is rsk nd I0 sclccI Ir0m Iw0 (0r m0rc)
sccurIcs whch hvc Ihc smc rcIurn 0r Ihc smc dcgrcc 0I rsk. !I s ssumcd
IhI Ihc nvcsI0r s rI0nl rskvcrsc, nd wll bc prcprcd I0 Ikc 0n
ddI0nl rsk 0nly I hc s ppr0prIcly c0mpcnsIcd I0r I. Thus, whcrc
28
Ihc rI0nl, rskvcrsc's nvcsI0r hs Ihc 0pI0n 0I sclccIng bcIwccn Iw0
sccurIcs X nd Y wIh Ihc smc rIc 0I rcIurn, hc wll sclccI Ihc 0nc wIh
l0wcr rsk. AlIcrnIvcly, I X nd Y hvc Ihc smc dcgrcc 0I rsk, hc wll
ch00sc Ihc 0nc wIh hghcr rIc 0I rcIurn.
Thc Inl ch0cc 0I sccurIy wll dcpcnd 0n Ihc nvcsI0r's IIIudc I0wrds
rsk. An nvcsI0r my bc rsk vcrsc, rsk ndIIcrcnI 0r rsk pr0nc. 0nc wy 0I
sscssng n nvcsI0r's IIIudc I0wrds rsk s Ihr0ugh c0nccpI kn0wn s
"CcrInIy EquvlcnI".
CcrInIy EquvlcnI s Ihc m0unI 0I m0ncy whch s0mc0nc rcqurcs wIh
ccrInIy I p0nI n Imc I0 mkc hm ndIIcrcnI I0 n unccrIn IuIurc
m0unI I Ihc smc p0nI n Imc. F0r cxmplc, I n ndvdul's pcrs0nl
dsp0sI0n I0wrds Ihc unccrIn IuIurc s such IhI ccrIn m0unI 0I sy
N0,000 w0uld gvc hm Ihc smc uIlIy (slcs IcI0r) s rsky N5,000
cxpccIcd vluc, Ihc N0,000 s hs 'ccrInIy cquvlcnI' nd hc s prcsumcd
I0 bc rsk vcrsc.
Thc uscIulncss 0I ccrInIy cquvlcnI n rskrcIurn nlyss 0I sccurIy s
IhI Is c0mprs0n wIh Ihc cxpccIcd vluc 0I rsky nvcsImcnI cn bc
uscd I0 dcInc Ihc IIIudc 0I n nvcsI0r I0wrds rsk. 0cncrlly, I n
nvcsI0r's:
() CcrInIy cquvlcnI s lcss Ihn Ihc cxpccIcd vluc Ihc nvcsI0r s
rsk vcrsc,
(b) CcrInIy cquvlcnI s cqul I0 Ihc cxpccIcd vluc Ihc nvcsI0r s rsk
ndIIcrcnI, nd
(c) CcrInIy cquvlcnI s grcIcr Ihn Ihc cxpccIcd vluc, Ihc nvcsI0r s
rsk pr0nc.
Thc dIIcrcncc bcIwccn Ihc nvcsI0rs ccrInIy cquvlcnI nd Ihc cxpccIcd
vluc 0I rsky nvcsImcnI crcIcs rsk prcmum. Ths s Ihc ddI0nl
cxpccIcd rcIurn whch Ihc rsky nvcsImcnI musI pr0vdc I0r Ihc nvcsI0r I0
cccpI I. Ths pck wll ssumc IhI nvcsI0rs gcncrlly rc rsk vcrsc. Ths
mcns IhI rsky sccurIcs musI pr0vdc hghcr cxpccIcd rcIurns Ihn lcss
rsky sccurIcs, I Ihcy hvc I0 IIrcI nvcsI0rs' m0ncs. Als0, n nvcsI0r
IhI wnIs l0w rsk musI bc c0nIcnIcd wIh l0w rcIurn. Thc hghcr Ihc rsk Ihc
hghcr Ihc rcIurn (cxpccIcd) nd vcc vcrs. Thus, n0Ihng s Ircc, "cvcn n
IrccI0wn", whcn I c0mcs I0 nvcsImcnIs.
282
Thc mn I0cus s Ihc rsk nd rcIurn 0I p0rII0l0 0I sccurIcs rIhcr Ihn 0I
snglc sccurIy hcld 0n sInd l0nc bss. !nvcsI0rs puI Ihcr m0ncs n
'p0rII0l0' 0r gr0up 0I sccurIcs.
()
Ths s Ihc wcghIcd vcrgc 0I Ihc cxpccIcd rcIurns 0I Ihc ndvdul
sccurIcs IhI mkc up Ihc p0rII0l0. Thc wcghIs rcprcscnI Ihc
pr0p0rI0n 0I I0Il nvcsIblc Iunds puI nI0 cch sccurIy. P0rII0l0
rcIurn s cxprcsscd s:
E(R
p
) =
=
m
|
| |
) R ( E w
whcrc s Ihc pr0p0rI0n 0I I0Il Iunds nvcsIcd n sccurIy
s Ihc cxpccIcd rcIurn I0r sccurIy | nd m s Ihc I0Il numbcr 0I
dIIcrcnI sccurIcs n Ihc p0rII0l0.
(b)
Thc rsk 0I p0rII0l0, unlkc Ihc p0rII0l0's cxpccIcd rcIurn, s n0I Ihc
wcghIcdvcrgc 0I Ihc ndvdul sccurIcs sIndrd dcvI0n.
RcIurns 0I sI0ck mrkcI sccurIcs c0rclIc nd cn bc IIccIcd by
c0mm0n IcI0rs. Ths rclI0nshp bcIwccn Iw0 0r m0rc sccurIcs
wIhn p0rII0l0 s sIIsIclly kn0wn s c0vrncc. Ths
rclI0nshp bcIwccn sccurIcs nd Is mpcI 0n p0rII0l0 rsk s Ihc
prncplc undcrlyng P0rII0l0 Thc0ry.
P0rII0l0 Ihc0ry, ls0 kn0wn s c0vrncc ppr0ch 0r Mrk0wIz ppr0ch
hclps n nvcsI0r I0 sclccI Ihc c0mbnI0ns 0I sccurIcs (p0rII0l0s) whch
gvc hm Ihc hghcsI rcIurns I0r Ihc rsks nv0lvcd. 0ncc Ihc nvcsI0r IcI0rs
n hs uIlIy IuncI0n, hc sclccIs IhI p0rII0l0 whch hs Ihc 0pIml rsk
rcIurn rclI0nshp. P0rII0l0 Ihc0ry bclcvcs IhI n nvcsI0r cn rcducc rsk
wIh0uI rcducng rcIurn by h0ldng p0rII0l0 0I I lcsI Iw0 sccurIcs nsIcd
0I nvcsIng n snglc sccurIcs hcld n s0lI0n. Ths s bscd 0n Ihc cxsIcncc
0I c0vrncc bcIwccn sccurIcs, Ihc dcgrcc 0I whch wll dcIcrmnc Ihc
cxIcnI 0I p0rII0l0 rsk rcducI0n.
P0rII0l0 Ihc0ry uscs Ihc c0nccpI 0I c0rrclI0n c0cIIccnI I0 mIhcmIclly
rcprcscnI Ihc cxpccIcd rcIurn nd rsk 0I Iw0sccurIcs (X nd Y) p0rII0l0
s I0ll0ws:
283
ExpccIcd RcIurn E(R
P
) = w
x
E(R
x
) + w
y
E(R
y
)
whcrc X nd Y rc Ihc sccurIcs, n Ihc p0rII0l0, E(R
P
) s Ihc cxpccIcd rcIurn
0I p0rII0l0 P

E(R
x
) s Ihc cxpccIcd rcIurn 0I sccurIy X nd w
x
s Ihc pr0p0rI0n
0I Ihc vlblc nvcsImcnI Iunds nvcsIcd n X, E(R
y
) s Ihc cxpccIcd rcIurn
0I sccurIy Y whlc w
y
s Ihc pr0p0rI0n (blncc) 0I vlblc Iunds nvcsIcd
n Y.
Rsk: \
p
=
xy y x y x
2
y
2
y
2
x
2
x
C0v . Sd . Sd w w 2 d . S w d . S w + +
0r
S.0
p
=
xy y x y x
2
y
2
y
2
x
2
x
C0v . Sd . Sd w w 2 d . S w d . S w + +
whcrc C0rr
xy
=
y x
xy
Sd . Sd
C0v
nd
C0v
xy
= ( ) ( ) ( ) ( )

y y x x v
R E R R E R P
whcrc Sd
x
s Ihc sIndrd dcvI0n 0I SccurIy x
Sd
y
s Ihc sIndrd dcvI0n 0I sccurIy y
C0rr
xy
s Ihc c0rrclI0n c0cIIccnI bcIwccn x nd y
C0v
xy
s Ihc c0vrncc bcIwccn x nd y
C0vrncc s sIIsIcl mcsurc 0I Ihc cxIcnI I0 whch Iw0
sccurIcs' rcIurns m0vc I0gcIhcr. !I Iw0 sccurIcs, hvng Ihc smc
pr0bblIy pcrI0rm wcll I0gcIhcr 0r bdly I0gcIhcr Ihcr rcIurns rc
sd I0 bc n Ihc smc drccI0n, Ihcy w0uld hvc p0sIvc c0vrncc.
!I Ihcr rcIurns m0vc n 0pp0sIc drccI0n Ihcr c0vrncc wll bc
ncgIvc. !I Ihc m0vcmcnI 0I Ihc rcIurns 0I 0nc s ndcpcndcnI 0I Ihc
m0vcmcnI 0I Ihc 0Ihcr's rcIurn Ihcr sgns wll cnccl 0uI nd c0
vrncc wll bc zcr0.
Thc c0rrclI0n c0cIIccnI (C0rr
xy
) s Ihc c0vrncc 0I X nd Y (C0v
xy
)
dvdcd by Ihc pr0ducI 0I Ihc sIndrd dcvI0ns 0I Ihc Iw0 sccurIcs.
C0rrclI0n c0cIIccnI s n0Ihcr wy 0I qunIIyng Ihc c0vrncc
bcIwccn rcIurns 0n Iw0 sccurIcs (x nd y). !I cn 0nly Ikc 0n vlucs
bcIwccn nd +. !I c0rrclI0n c0cIIccnI s + I mcns Ihc
rcIurns 0n Iw0 sccurIcs rc pcrIccIly p0sIvcly c0rrclIcd, I I s ,
Ihcy rc pcrIccIly ncgIvcly c0rrclIcd, I I s zcr0, Ihcy rc
bs0luIcly unc0rrclIcd.
284
!n prcIcc, sccurIcs rcIurns rc n0I pcrIccIly p0sIvcly c0rrclIcd.
Smlrly rsky nvcsImcnIs rc n0I usully ncgIvcly c0rrclIcd 0r
cvcn ndcpcndcnI s Ihcy rc IIccIcd by c0mm0n IcI0rs. Thus, whI
cxsIs n prcIcc s l0w (0r hgh) c0rrclI0n bcIwccn sccurIcs'
rcIurns, I0r cxmplc, 0.2, 0.3, 0.7, 0.8.
()
S.d
E(R)
X
Y
P0ssblc c0mbnI0n 0I X nd Y whcn C0rr
xy
= +. Thc rsk 0I ny
c0mbnI0n 0I X nd Y wll smply bc cqul I0 Ihc wcghIcd vcrgc
0I ndvdul sccurIcs' rsks s I0ll0ws:
\
p
=
y x y x
2
y
2
y
2
x
2
x
Sd . Sd w w 2 d . S w d . S w + + .
Ths s pcrIccI squrc whch whcn rcrrngcd bcc0mcs:
(w
x
Sd
x
+ w
y
Sd
y
) (w
x
Sd
x
+ w
y
.Sd
y
)
Tkng Ihc squrc r00Is 0I b0Ih sdcs:
S.0
p
= w
x
Sd
x
+ w
y
.Sd
y
.
Any c0mbnI0n 0I X nd Y wIh prIculr vlucs 0I wx nd wy wll
bc 0n sIrghI lnc |0nng X nd Y nd n0 prIculr dvnIgc wll
ccruc by c0mbnng X nd Y.
Supp0sc C0rr
xy
s lcss Ihn +. Thcn Ihc rghIhnd sdc 0I Ihc cquI0n
musI bc lcss Ihn Ihc wcghIcd vcrgc 0I Ihc rsks 0I Ihc ndvdul
sccurIcs. Thc mplcI0n 0I Ihs s IhI s l0ng s Iw0 sccurIcs rc
n0I pcrIccIly c0rrclIcd, s0mc bcncIIs c0uld ccruc Ir0m c0mbnng
Ihcm.
285
S.d
E(R)
X
Y
P0ssblc c0mbnI0n 0I X nd Y whcrc C0rr
xy
= .
Thc rsk 0I Ihc c0mbnI0n 0I X nd Y wll grcIly Ill nd cn cvcn
Ill I0 zcr0 whcrc Ihc p0rII0l0 c0mprsc 0nly Iw0 sccurIcs. Ths, Ihcn,
s rsklcss p0rII0l0.
whcrc C0rr
xy
=
\
p
bcc0mcs
y x y x
2
y
2
y
2
x
2
x
Sd . Sd w w 2 d . S w d . S w +
Ths s ls0 pcrIccI squrc whch whcn rcrrngcd bcc0mcs
\
p
= (w
x
Sd
x
w
y
Sd
y
) (w
x
Sd
x
w
y
Sd
y
)
Tkng Ihc squrc r00I 0I b0Ih sdcs
S.0
p
= w
x
Sd
x
w
y
.Sd
y
. whcrc Ihc Iw0 vcrIcl lncs rcqurc bs0luIc
vlucs. Ths mcns IhI whchcvcr squrc r00I, hs p0sIvc vluc.
(3)
Hcrc, C0rr
xy
wll bc cqul I0 zcr0 s Ihc Iw0 sccurIcs rc n0I IIccIcd
by ny c0mm0n IcI0rs, ny smlr m0vcmcnIs I ll, wll bc mcrc
c0ncdcncc.
\
p
=
2
y
2
y
2
x
2
x
d . S w d . S w +
0ncc n nvcsI0r hs kn0wlcdgc 0I hs uIlIy IuncI0n (bss I0r
drwng up hs ndIIcrcncc curvcs) hc w0uld bc blc I0 sclccI hs
28b
0pIml p0rII0l0: IhI p0rII0l0 whch mxmscs hs uIlIy s sh0wn
grphclly bcl0w:
SIndrd 0cvI0n
M
Scc0nd
!nvcsI0r
FrsI
!nvcsI0r
(
E
x
p
c
c
I
c
d

R
c
I
u
r
n
)
0pIml p0rII0l0 Ir0m nnc sccurIcs I0r nvcsI0rs wIh dIIcrcnI
uIlIy IuncI0ns.
All c0mbnI0ns (p0rII0l0s) 0I m0rc Ihn Iw0 sccurIcs wll lc
wIhn 0r 0n Ihc b0vc umbrcllshpcd rcg0n. Ths rcg0n s kn0wn
s nd ll p0rII0l0s lyng nsdc Ihs rcg0n rc
cllcd . Thc curvc xy s kn0wn s
nd ll p0rII0l0s lyng 0n Ihs curvc rc cllcd
. Thus, XPY rc cIIccnI p0rII0l0s: Ihcy rc cIIccnI
bccusc Ihcy d0mnIc ny 0Ihcr p0rII0l0 n Ihc Icsblc rcg0n. Any
p0rII0l0 0n Ihc cIIccnI Ir0nIcr, whcn c0mprcd wIh ny 0Ihcr
p0rII0l0 n Ihc Icsblc rcg0n, hs hghcr rcIurn I0r Ihc smc rsk
lcvcl 0r l0wcr rsk I0r Ihc smc rcIurn. An nvcsI0r wh0 wshcs I0
sclccI p0rII0l0 0n Ihc xy curvc IhI mxmscs hs rcIurn I0r gvcn
lcvcl 0I rsk w0uld nccd I0 c0nsIrucI hs ndIIcrcncc curvcs nd sclccI
IhI p0nI whcrc hs ndIIcrcncc curvc s IngcnI I0 xy curvc. Fr0m
Ihc grph, Ihc IrsI nvcsI0r w0uld d0pI s hs 0pIml p0rII0l0
whlc Ihc scc0nd nvcsI0r w0uld sclccI P s hs 0wn 0pIml p0rII0l0.
Thc Iw0 nvcsI0rs w0uld pr0bbly mkc dIIcrcnI ch0cc Ir0m Ihc
smc cIIccnI Ir0nIcr bccusc Ihcy 0bv0usly hvc dIIcrcnI IIIudcs
I0 Ihc rskrcIurn rclI0nshps 0I Ihc ndvdul cIIccnI p0rII0l0s.
Thcsc dIIcrcnI IIIudcs rc sh0wn n Ihcr dIIcrcnI uIlIy IuncI0ns
nd IhcrcI0rc Ihcr dIIcrcnI ndIIcrcncc curvcs. !n ddI0n, Ihc
scc0nd nvcsI0r mghI cvcn hvc dIIcrcnI 0pp0rIunIy scI (ll p0ssblc
p0rII0l0s) nd cIIccnI Ir0nIcr Ir0m Ihc IrsI nvcsI0r bccusc hc
my sscss Ihc cxpccIcd rcIurns nd rsks 0I Ihc nnc sccurIcs
dIIcrcnIly. !n Ihs csc, hc w0uld hvc c0mplcIcly dIIcrcnI
umbrcll.
287
An nvcsImcnI nlysI hs pr0vdcd Ihc I0ll0wng dI n rcspccI 0I
sccurIcs A nd :
A 250 38
2250 b37
A pr0spccIvc nvcsI0r bclcvcs IhI by c0mbnng sccurIcs A nd
n Ihc pr0p0rI0n b0 nd 40 rcspccIvcly, hc c0uld mpr0vc hs
p0sI0n.
ClculIc Ihc p0rII0l0 rcIurn nd rsk whcrc Ihc c0rrclI0n c0cIIccnI
s +, , nd 0
P0rII0l0 rsk s gvcn by
S.d
p
=
A A A
2

2
A
2
A
C0rr . Sd . Sd w w 2 d . S w d . S w + +
() C0rrclI0n C0cIIccnI 0I +
S.d
p
=
( ) ( ) ( ) ( ) ( )( )( )( )( ) b37 38 4 . 0 b . 0 2 b37 4 . 0 38 b . 0
2 2 2 2
+ +
=
b495 b4923 258 , 52 + +
=
233b7b
=
()
S.d
p
=
( ) ( ) ( ) ( ) ( )( )( )( )( ) 0 b37 38 4 . 0 b . 0 2 b37 4 . 0 38 b . 0
2 2 2 2
+ +
=
0 b4923 258 , 52 +
=
8 , 7
=
288
Sdp =
( ) ( ) ( ) ( ) ( )( )( )( )( ) b37 38 4 . 0 b . 0 2 b37 4 . 0 38 b . 0
2 2 2 2
+ +
=
b495 b4923 258 , 52 +
=
495 , b 8 , 7
=
b8b
0vcrsIcI0n mcns nvcsIng n s mny sccurIcs s p0ssblc
s0 s I0 sprcd Ihc rcIurn vrblIy 0I Ihc p0rII0l0. P0rII0l0s 0I
sccurIcs sh0uld bc c0nsc0usly c0nsIrucIcd n such wy, s0 s I0
rcducc Ihc rsk 0I Ihc p0rII0l0 (.c. hc sh0uld v0d puIIng ll hs
cggs n 0nc bskcI). An nvcsI0r sh0uld I0r cxmplc, n0I puI ll hs
nvcsImcnI n 0nc ndusIry. Ths s whI s cllcd
. !nsIcd, hc sh0uld sprcd hs wclIh 0vcr ndusIrcs
wh0sc rcIurns mghI bc ncgIvcly c0rrclIcd 0r hvc l0w lcvcl 0I
p0sIvc c0rrclI0n. !I Ihc smc m0unI 0I m0ncy s nvcsIcd n cch
0I Ihc ndusIrcs, I s cxpccIcd IhI Ihc dspcrs0n 0I rcIurn w0uld
bc rcduccd. Ths s bccusc s0mc 0I cch ndvdul sccurIy's rsk s
0IIscIIng. cncIIs 0I dvcrsIcI0n Ihr0ugh rsk rcducI0n, rc
rcccvcd s l0ng s Ihc sccurIcs rc n0I pcrIccIly nd p0sIvcly
c0rrclIcd.
Als0, gl0bl nvcsImcnI n w0rld Inncl mrkcIs Icnds I0 chcvc
grcIcr dvcrsIcI0n Ihn nvcsIng n d0mcsIc sccurIcs l0nc.
Thc swngs n cc0n0mc cyclcs my bc dIIcrcnI Ir0m c0unIry I0
c0unIry.
!I hs |usI bccn sIIcd IhI Ihc p0rII0l0 rsk cn bc l0wcrcd by
c0mbnng sccurIcs IhI rc n0I pcrIccIly p0sIvcly c0rrclIcd.
H0wcvcr, h0w mny sccurIcs sh0uld bc n p0rII0l0 n 0rdcr I0
subsInIlly rcducc rsk nd I Ihc smc Imc v0d SupcrIlu0us
dvcrsIcI0n! Evdcncc hd sh0wn IhI s Ihc numbcr 0I shrcs,
sclccIcd I rnd0m n p0rII0l0 ncrcscs, Ihc I0Il rsk 0I Ihc
p0rII0l0 dccrcscs I dccrcsng rIc. Thus, by hvng m0dcrIc
289
szc 0I p0rII0l0 0I sy bcIwccn 0 nd 20 sccurIcs ch0scn I rnd0m
n cqul Nr hgh pr0p0rI0n 0I rsk cn bc clmnIcd s sh0wn
bcl0w:
Numbcr 0I sccurIcs n P0rII0l0
S
0

0
I

P
0
r
I
I
0
l

0

R
c
I
u
r
n
CpIlAsscI Prcng M0dcl (CAPM) r0sc Ir0m Ihc c0mplcxIy nd vcry lrgc
szc 0I c0mpuII0ns nccdcd n P0rII0l0 Thc0ry. whcrcs, p0rII0l0 Ihc0ry
dcls wIh c0vrncc bcIwccn prs 0I sccurIcs n p0rII0l0, Ihc CAPM s
c0nccrncd wIh Ihc c0vrncc 0I Ihc sccurIy wIh Ihc mrkcI s wh0lc s
mrr0rcd by Ihc mrkcI ndcx rcIurn.
Thc CAPM dvdcs Ihc I0Il rsk (Sd) 0I sccurIy nI0 sysIcmIc nd
unsysIcmIc rsk.
(ls0 kn0wn s 0r 0r
rsk) s Ihc rsk 0I Ihc sI0ck mrkcI s wh0lc. !I s rsk cuscd by IcI0rs
IhI IIccI Ihc mrkcI s wh0lc cxmplc 0I such IcI0rs rc nIcrcsI rIc,
nIlI0n, Ix rcI0rm 0I NI0nl Asscmbly, chngcs n Ihc gl0bl prccs 0I
0l, p0lIcl IcI0r nd gl0bl cc0n0mc mclId0wn.
(ls0 kn0wn s 0r 0r
) s Ihc rsk IhI s unquc I0 Ihc sccurIy 0r Ihc c0mpny 0r Ihc ndusIry
n whch Ihc c0mpny 0pcrIcs, cxmplcs 0I such rsks rc p00r mngcmcnI,
c0mpcII0n, cusI0m IrII, ndusIrl sIrkc nd s0 0n.
CAPM sIIcs IhI unsysIcmIc rsk 0I sccurIy cn bc dvcrsIcd wy
lcvng 0nly Ihc sysIcmIc rsk. Thus unsysIcmIc rsk cn, Ihr0ugh
dvcrsIcI0n, bc rcduccd 0r cvcn bc clmnIcd I dvcrsIcI0n s vcry
cIIccnI. 0n Ihc 0Ihcr hnd, Ihc m0dcl clms IhI sysIcmIc rsk, bcng Ihc
rsk 0I Ihc wh0lc mrkcI cnn0I bc s0 dvcrsIcd wy. N0 mIIcr h0w mny
shrcs n nvcsI0r buys, cvcn I hc buys ll Ihc shrcs 0n Ihc sI0ck mrkcI.
Thc nvcsI0r wll sIll bcr Ihc rsk 0I Ihc sI0ck mrkcI whch s unv0dblc.
290
Thc 0nly rclcvnI rsk 0I shrc s IhcrcI0rc Is sysIcmc rsk. Thc mplcI0n
0I Ihs I0r nvcsI0rs s IhI cc0rdng I0 CAPM, Ihcy 0nly nccd I0 b0Ihcr
Ihcmsclvcs b0uI Ihc sysIcmIc rsk 0I sccurIy s Ihs s Ihc 0nly rsk I0r
whch Ihcy w0uld bc c0mpcnsIcd. Thcy sh0uld n0I cxpccI I0 bc rcwrdcd
I0r bcrng rsk IhI s unquc I0 Ihc c0mpny. !I s ssumcd Ihcy w0uld
hvc dvcrsIcd wy Ihs Iypc 0I rsk.
()
CAPM dcIncs Ihc rclI0nshp bcIwccn cxpccIcd rcIurn nd rsk 0I
n ndvdul sccurIy n Ihc I0rm 0I n cquI0n s I0ll0ws:
E(R

) = R
I
+ (E(R
m
R
I
) | whcrc | cn ls0 bc rcprcscnIcd by
m Sd
) m ( C0v
2
nd E(R

) s cxpccIcd rcIurn 0n Ihc sccurIy

R
I
s Ihc rskIrcc rcIurn
E(R
m
) s Ihc cxpccIcd mrkcI rcIurn
| s Ihc bcI 0I Ihc sccurIy
Ths cquI0n, ls0 kn0wn s Ihc SccurIy MrkcI Lnc (SML) IIcmpIs
I0 cxpln Ihc cxpccIcd rcIurn 0I sccurIy s IuncI0n 0I Is c0
vrncc wIh Ihc mrkcI s mcsurcd by Is bcI ( | ). Thc 0nly
IcI0r whch dIIcrcnIIcs Ihc rcIurns 0I sccurIy Ir0m ll 0Ihcr
rcIurns s Is bcI IcI0r (Ihc cxIcnI I0 whch Ihc prIculr sccurIy's
cxpccIcd rcIurns c0vry wIh Ihc cxpccIcd rcIurns Ir0m Ihc mrkcI
s wh0lc: Ihc mrkcI ndcx rcIurn).
Thc undcrlyng rcs0nng I0r Ihc b0vc cquI0n s IhI s0mc shrcs
rc m0rc v0lIlc Ihn 0Ihcrs n Ihc mrkcI. Thcr rcIurns rcsp0nd
m0rc Ihn pr0p0rI0nIc I0 spccIcd pcrccnIgc chngcs n Ihc
mrkcI ndcx rcIurn. 0Ihcrs vry lcss Ihn pr0p0rI0nIc. SIll 0Ihcr
shrcs' rcIurns rccI cxcIly by Ihc smc pr0p0rI0n. !I, I0r cxmplc,
s rcsulI 0I gcncrl IcI0rs IIccIng Ihc mrkcI (sysIcmIc rsk),
Ihc mrkcI ndcx rcIurn ncrcscs by, sy, 0 pcrccnI, sh0uld
prIculr shrc's rcIurn ncrcsc by m0rc Ihn 0, 0r lcss Ihn
0 0r cxcIly cqul I0 0. Ihc bcI 0I such sccurIy w0uld bc grcIcr
Ihn , lcss Ihn nd cqul I0 rcspccIvcly.
29
(b)
Systematic Risk ( | )
RI
E
x
t
e
n
d
e
d

R
e
t
u
r
n
E
(
R
i
)

S
c
c
u
r

I
y
M

rk
c
I
L

n
c
(
S
M
L
)
whcrc sccurIy hs n0 rsk, Is cxpccIcd rcIurn wll bc Ihc rskIrcc
rIc. As bcI ncrcscs Ihc mrkcI w0uld bc dcmndng I0r n
ncrcsngly bg rsk prcmum 0vcr Ihc rskIrcc rIc.
(c) |
cI pr0vdcs mcsurc 0I sysIcmIc rsk 0I sccurIy. Thc grcIcr
cI s, Ihc grcIcr Ihc sysIcmIc rsk 0I Ihc sccurIy nd Ihc hghcr
rc Ihc cxpccIcd rcIurns 0I IhI sccurIy.
(d) cI 0
An nvcsI0r, dcpcndng 0n hs IIIudc I0wrds Ihc mrkcI, IhI s,
bullsh 0r bcrsh, s blc I0 buld up p0rII0l0 0I hghcr 0r l0wcr
bcIs rcspccIvcly n 0rdcr I0 mxmsc Ihc rcIurn 0r mnmzc Ihc
rsk 0I hs p0rII0l0 s Ihc csc my bc. !I sh0uld bc n0Icd h0wcvcr
IhI rcIurn mxmsI0n mcns Ikng 0n hghcr mrkcI rsk.
(c)
() !nvcsI0rs rc rI0nl nd rskvcrsc nd Ihcy rc nIcrcsIcd
n mxmzng cxpccIcd uIlIy 0I wclIh,
() Thcrc rc lrgc numbcr 0I buycrs nd scllcrs n Ihc sI0ck
mrkcI,
() Thc 0nly Iw0 chrcIcrsIcs 0I sccurIy IhI cngcndcrs Ihc
nIcrcsIs 0I nvcsI0r rc Is rsk nd rcIurn.
(v) Thcrc s n cxsIcncc rskIrcc rIc 0I rcIurn nd ll nvcsI0r
lcnd 0r b0rr0w wIh0uI lmI I Ihs smc rIc,
(v) Thcrc rc n0 IrnscI0n c0sIs,
R
I
292
(v) N0 IxI0n, nd
(v) All nvcsI0rs hvc dcnIcl vcws 0I cch sccurIy.
() T0yn AdcpIc vlucd clcnI 0I y0ur sI0ck br0kng Irm hs skcd
I0r y0ur dvcc 0n hs nvcsImcnIs p0rII0l0. Hc h0lds Ihc I0ll0wng
sccurIcs n Ihc sI0ck mrkcI (hvng Ihc lsIcd rsk chrcIcrsIcs
(sh0wn bcl0w) whch s rcgrdcd s cIIccnI:
SIndrd 0cvI0n 5 4 5
C0rrclI0n C0cIIccnI 40 b0 80
Am0unI nvcsIcd 30 40 30
Thc sIII 0I Ihc nvcsImcnI dcprImcnI 0I y0ur Irm hs csImIcd Ihc
cxpccIcd rcIurn 0n shrcs n gcncrl, 0n Ihc bss 0I psI rcIurn nd
nIlI0nry cxpccII0n, I0 bc 20. !I s cxpccIcd IhI Ihc rsk prcmum
wll bc b0uI 5. Thc rsk 0I Ihc mrkcI s mcsurcd by Is sIndrd
dcvI0n s 8. All Ihc Ihrcc shrcs lc 0n Ihc SccurIcs MrkcI Lnc
(SML).
() Thc cxpccIcd rcIurn 0I y0ur clcnI's p0rII0l0, nd
() Thc rsk 0I Ihc p0rII0l0.
Assumc Ihc CpIl AsscI Prcng M0dcl (CAPM) ppr0ch
() cI IcI0r ( | ) hs I0 bc c0mpuIcd I0r cch shrc usng Ihc
I0rmul:
=
m
| C0rrm|
o
o
X =
75 . 0
08 . 0
5 . 0 x 4 . 0
=
Y =
05 .
08 . 0
4 . 0 x b . 0
=
293
Z =
5 . 0
08 . 0
05 . 0 x 8 . 0
=
ExpccIcd RcIurn: R = ( )
I m I
R R R | +
R
x
= 0.5 + 0.75 (0.05) = 8.75
R
y
= 0.5 + .05 (0.05) = 20.25
R
z
= 0.5 + 0.5 (0.05) = 7.5
ER
p
= 0.30(0.875) + 0.40(0.2025) + 0.30 (0.75)
= 5.b3 + 8. + 5.25
= 8.98 0r 9 ppr0x.
() | p = 0.30(0.75) + 0.40(.05) + 0.30(0.5)
= 0.23+0.42+0.5
= 0.80
R
m
R
I
= 0.05
0.20 R
I
= 0.05
R
I
= 0.20 0.05
= 0.5
ArbIrgc Prcng M0dcl (APM), unlkc Ihc CAPM bclcvcs IhI Ihc prcc 0I
sccurIy, bscd 0n Is rsk nd rcIurn chrcIcrsIcs, s nIlucnccd by m0rc
Ihn 0nc snglc rsk IcI0r. !n 0rdcr I0 kn0w whcIhcr sccurIy s 'dcr' 0r
chcp smll numbcr 0I gcncrl cc0n0mc rsk IcI0r c0uld bc cxmncd.
Thc m0dcl ssumcs cIIccncy 0I Ihc sI0ck mrkcIs n Icrms 0I 'I0rccd' cqulIy
0I Ihc prccs 0I Iw0 smlr sccurIcs v rbIrgc. A smplc Iw0IcI0r m0dcl
cn bc rcprcscnIcd by Ihc I0ll0wng cquI0n:
( )
2 2 I
b b r r E + + =
whcrc E (r

) s Ihc cxpccIcd rcIurn 0n sccurIy

r
I
s Ihc rcIurn 0n rskIrcc sccurIy
2
rc Ihc vlucs 0I IuIurc (unccrIn) mcr0 cc0n0mc IcI0rs such s
nIlI0n, nIcrcsI rIcs.
2
b b rc mcsurcs 0I Ihc dcgrcc 0I rcsp0nsvcncss 0I Ihc sccurIy's rcIurn I0
spccIcd pcrccnIgc chngc n IcI0r.
294
Thc prmcIcr lmbd (

) rcprcscnIs Ihc rsk prcmums (cxccss rcIurn) n
rcspccI 0I Ihc Iypcs 0I rsk c0nnccIcd wIh ndvdul IcI0rs. F0r nsIncc,

s Ihc cxpccIcd cxccss rcIurn (rcIurn b0vc Ihc rskIrcc rIc) I b

s cqul
I0 nd b
2
s cqul I0 zcr0. Thc b

nd b
2
rc, n sh0rI, Ihc mcsurcs 0I Ihc
sysIcmIc 0r unv0dblc 0r undcrvsIblc rsk.

cn bc p0sIvc
(ndcIng rsk vcrs0n by Ihc mrkcI I0 Ihc IcI0r nv0lvcd) nd ncgIvc
(ndcIng Ihc IcI IhI Ihc mrkcI s skng I0r l0wcr rcIurn).
Thc shrc 0I Lckk T0ursIs Plc. s lnkcd wIh Ihc IcI0rs whcrc Ihc mcsurcs
0I Ihc dcgrcc 0I rcsp0nsvcncss b

nd b
2
rc .5 nd 0.8 rcspccIvcly. !I Ihc
rskIrcc rIc (s cvdcnccd by CN Trcsury ll rIc) s 0 pcrccnI,

, 5
pcrccnI nd
2
s 3 pcrccnI, clculIc Ihc cxpccIcd rcIurn 0I Ihc shrc.
E(R) = ( ) ( )
2 2 I
b b r + +
= 0.0 + (.5) (0.05) + 0.8(0.03)
= 0.0 +0.075 0.024
= 0.75 0.024
= 0.5 0r 5.0
N0Ic: !I sh0uld bc n0Icd IhI Ihc APM c0uld bc pplcd I0 IcI0rs m0rc Ihn
Iw0, sy 4 s sh0wn:
( )
4 4 3 3 2 2 I
b b b b r r E + + + + =
Thcrc rc Iw0 m|0r p0lccs cIvc p0rII0l0 p0lcy (ls0 kn0wn s
ggrcssvc: buy & scll) nd pssvc p0rII0l0 p0lcy (ls0 kn0wn s dcIcnsvc,
buy nd h0ld 0r buyng I0r l0ng pull). Thc I0ll0wng sIrIcgcs rc n0rmlly
pursucd undcr cIvc p0lcy.
Hcrc nlysIs bclcvc IhI shrc hs n nIrnsc 0r Iruc vluc
whch s Ihc prcscnI vluc 0I ll IuIurc csh Il0w IhI rsc Ir0m
0wncrshp 0I Ihc shrc. Thcy IurIhcr bclcvc IhI lIh0ugh ll
nvcsI0rs hvc pcrIccI nI0rmI0n b0uI cch sccurIy, Ihc pr0ccss
0I nc0rp0rIng nI0rmI0n nI0 prcc s sIll dcIccIvc nd
c0nscqucnIly Ihcrc c0uld bc sgnIcnI dIIcrcnccs bcIwccn shrc
prccs nd nIrnsc vluc whch cn bc pr0IIbly cxpl0Icd. Thc
IundmcnIlsI uIlscs Ihc dvdcnd vluI0n m0dcl
295
( ) ( ) ( )

= I

n
n
2
2

0
r +
0
0r
r +
0
.....
r +
0
+
r +
0
= P
whch cn bc IurIhcr
m0dIcd nI0
( )
g r
g 0
P
0
0

+
=
00rd0n's 0r0wIh m0dcl. !I ssumcs
IhI 0
0
wll bc 0bIncd I c0nsInI gr0wIh rIc 0I g. Rcdcrs
sh0uld n0Ic IhI 0
0
s Ihc dvdcnd IrsI pd. !I Ihc nIrnsc vluc
0bIncd s hghcr Ihn Ihc currcnI shrc prcc Ihc shrc s c0nsdcrcd
undcrvlucd nd sh0uld bc b0ughI. !I I s l0wcr Ihn Ihc cIul shrc
prcc, I s 0vcrvlucd nd sh0uld bc s0ld.
Tcchncl nlyss bclcvc IhI sccurIy prccs prIculrly shrc prccs,
rc Irly vlublc nd ny0nc wh0 cn succcssIully prcdcI Ihc
drccI0n 0I nIcrcsI rIcs (nd IhcrcI0rc b0nd prccs) nd shrc prccs
cn c0rrccIly Imc nvcsImcnI I0 bcI Ihc mrkcI. Thc 0b|ccIvc s I0
0bIn n b0vcvcrgcrcIurn.
Tcchncn's usc nI0rmI0n b0uI psI shrc prcc I0 prcdcI Ihc Ircnd
0I IuIurc shrc prcc. ChrIsIs c0nIcnd IhI shrc prccs m0vc n Ircnds
nd pIIcrns whch pcr0dclly rcpcI Ihcmsclvcs s0 IhI Ihc kcy I0
mkng gns s I0 rcc0gnsc Ihcsc pIIcrns bcI0rc 0Ihcrs. Tcchncns
mkc usc 0I chrIs nd grphs 0I shrc prcc nI0rmI0n nd
mcchncl Irdng rulcs.
Ths Ihc0ry whch s lrgcly n cxIcns0n 0I Ihc IundmcnIl Ihc0ry
ls0 bclcvcs IhI shrc hs n nIrnsc vluc buI IhI Ihs vluc
wll bc lIcrcd s ncw nI0rmI0n bcc0mcs vlblc. Thc bchv0ur
0I Ihc nvcsI0rs s such IhI Ihc cIul prcc wll IlucIuIc I rnd0m
r0und Ihc nIrnsc vluc. Thc Ihc0ry ls0 p0sIulIcs IhI succcssIul
shrc prcc chngcs rc ndcpcndcnI 0I cch 0Ihcr s psI shrc prcc
bchv0urs c0nIn n0 nI0rmI0n IhI cn nIlucncc Ihc prcscnI 0r
IuIurc shrc prcc lcvcl.
EIIccnI MrkcI Hyp0Ihcss cxIcnds Ihc dc 0I Rnd0m wlk Thc0ry
(RwT) nd sIIcs IhI I mrkcI s pcrIccIly cIIccnI, Ihcn I ll Imcs,
prccs sh0uld pcrIccIly rcIlccI Ihc nI0rmI0n vlblc I0 nvcsI0rs
nd Ihcr dvs0rs. Thus, I wll n0I bc p0ssblc I0r n nlysI I0 c0ncludc
IhI prIculr shrc s chcp 0r cxpcnsvc whcn c0mprcd wIh Is
nIrnsc vluc.
29b
0cIls 0I Ihc I0rms 0I mrkcI cIIccncy hd lrcdy bccn dscusscd
undcr sI0ck mrkcI cIIccncy.
PcrI0rmncc mcsurcmcnI, v Ihc usc 0I rclcvnI pcrI0rmncc
mcsurcs, s n0rmlly crrcd 0uI I0r Ihc I0ll0wng purp0scs.
() T0 kn0w whcIhcr Ihc 0rgnlly scI p0rII0l0 0b|ccIvcs hvc
bccn chcvcd.
(b) T0 c0mprc Ihc nvcsI0r's p0rII0l0 pcrI0rmncc wIh Ihc
p0rII0l0s whch hvc smlr 0b|ccIvcs.
(c) T0 pr0vdc chcck 0n Ihc cIvIcs 0I Ihc Iund mngcrs
2.0.2
Thcrc rc Iw0 mn mcIh0ds 0I mcsurng Ihc rcIurn 0I p0rII0l0:
Ihc m0ncy wcghIcd rIc 0I rcIurn (MwR0R) nd ImcwcghIcd rIc
0I rcIurn (TwR0R)
()
Ths s smplc mcIh0d uscd I0 c0mpuIc Ihc 0vcrll rcIurn 0n
cpIl nvcsIcd 0vcr spccIcd pcr0d 0I Imc. !I s clculIcd
by dvdng Ihc I0Il rcIurn Ir0m p0rII0l0 0vcr pcr0d by
Ihc wcghIcd vcrgc sum nvcsIcd n Ihc p0rII0l0 0vcr Ihc
pcr0d. RcIurn c0nsdcrs b0Ih cpIl pprccI0n (0r l0ss) nd
nc0mc.
0n 1nury n nvcsI0r's p0rII0l0 ws vlucd I N00,000. AI Ihc
cnd 0I Mrch hc wIhdrcw N20,000 buI hc nvcsIcd IurIhcr N30,000
I Ihc cnd 0I ScpIcmbcr. 0n 3sI 0cccmbcr, Ihc P0rII0l0 ws vlucd
I N20,000 ncludng rcnvcsIcd nc0mc. ClculIc Ihc m0ncy
wcghIcd vcrgc rIc 0I rcIurn 0n Ihc p0rII0l0.
N
!nIl \luc 00,000
Add ncw nvcsImcnI 30,000
30,000
Lcss wIhdrwls 20,000
0,000
297
Fnl \luc 20,000
T0Il RcIurn 0,000
wcghIcd Avcrgc sum !nvcsIcd N
1n. Mr. N00,000 x 3/2 25,000
Apr. ScpI. N80,000 x b/2 40,000
0cI. 0cc. N0,000 x 3/2 27,500
MwR0R =
500 , 92 N
000 , 0 N
=
Ths rIc cn bc Ih0ughI 0I s Ihc rIc 0I nIcrcsI whch Ihc nIl
p0rII0l0 plus ncI ncw m0ncy w0uld hvc hd I0 crn n dcp0sI
cc0unI n 0rdcr I0 ccumulIc I0 Ihc cIul vluc 0I Ihc p0rII0l0 I
Ihc cnd 0I Ihc ycr.
Ths s uscIul I0r n ndvdul buI ndcquIc nd s0mcImcs
mslcdng I0r n nsIIuI0nl nvcsI0r.
(b)
whcn c0mprng Ihc pcrI0rmncc 0I Iund mngcrs, Ihs wll
bc Ihc ppr0prIc mcIh0d I0 usc s I rcc0gnzcs Ihc cIIccIs 0I
Imng 0I csh nIl0ws whch my bc bcy0nd Ihc c0nIr0l 0I Ihc
mngcr. T0 d0 Ihs, Ihrcc sIcps sh0uld bc I0ll0wcd:
() 0cIcrmnc Ihc dIc 0n whch cch csh Il0w 0ccurs nd
Ihc vluc 0I Ihc p0rII0l0 0n cch such dIc,
() F0r Ihc pcr0d bcI0rc nd IIcr Ihc csh nIl0w, clculIc
Ihc prcc rclIvcs by dvdng Ihc vluc 0I Ihc Iund I
Ihc cnd 0I Ihc pcr0d by Ihc vluc I Ihc bcgnnng, nd
() MulIply Ihc prcc rclIvcs I0gcIhcr nd subIrcI I0
gcI Ihc ImcwcghIcd rIc 0I rcIurn s dccml.
Assumc Ihc b0vc p0rII0l0 ws vlucd 0n 30Ih ScpIcmbcr I
N0,000, clculIc Ihc Imc wcghIcd rIc 0I rcIurn 0I Ihc
p0rII0l0.
TwR0R wll bc clculIcd s I0ll0ws:
1nury I0 ScpIcmbcr 30: Prcc RclIvc = N
375 .
80
0
=
298
0cI0bcr I0 0cccmbcr 3: Prcc RclIvc = N
857 . 0
40
20
=
Pr0ducI = .375 x 0.857 = .784
SubIrcI gvcs .784 = 0.784
= 7.84
P0rII0l0 mngcmcnI s c0nccrncd wIh h0w nvcsI0rs c0nsIrucI, cvluIc
nd mcsurc Ihc pcrI0rmncc 0I Ihcr p0rII0l0s 0I sccurIcs. P0rII0l0 hcrc
mcns c0mbnI0ns 0I sccurIcs. Thcrc rc vr0us p0rII0l0 mngcmcnI
Icchnqucs Ihc plnnng Icchnqucs (P0rII0l0 Thc0ry nd CAPM), Ihc
sIrIcgsng Icchnqucs (Ihc IundmcnIl Ihc0ry, Ihc Icchncl Ihc0ry, Ihc
rnd0m wlk Ihc0ry nd Ihc cIIccnI mrkcI hyp0Ihcss) Ihc rbIrgc
prcng m0dcl nd Ihc mcsurcmcnI Icchnqucs (Ihc m0ncywcghIcd rIc
0I rcIurn nd Ihc ImcwcghIcd rIc 0I rcIurn).
P0rII0l0 Ihc0ry's ppr0ch I0 p0rII0l0 plnnng l00ks I Ihc cxpccIcd rcIurn
0I p0rII0l0 nd Ihc I0Il rsk 0I IhI p0rII0l0 s mcsurcd by Is sIndrd
dcvI0n. CAPM's ppr0ch c0nsdcrs 0nly Ihc sysIcmIc rsk 0I Ihc p0rII0l0,
bclcvng IhI Ihc unsysIcmIc rsk hs bccn wcll dvcrsIcd wy. !I uscs
Ihc c0nccpI 0I bcI I0 mcsurc Ihs rsk. Thcrc rc Iw0 Iypcs 0I p0lccs I0
I0ll0w n mngng p0rII0l0 0I sccurIcs Ihc cIvc p0lcy (buy nd scll)
nd Ihc pssvc p0lcy (buy nd h0ld). Th0sc wh0 I0ll0w Ihc cIvc p0lcy
usully d0pI ny 0I Ihc I0ll0wng sIrIcgcs FundmcnIl Ihc0ry, Tcchncl
nlyss, Rnd0m wlk Ihc0ry nd cIIccnI mrkcI hyp0Ihcss. Thc csscncc
0I plnnng lcs n c0nIr0l. Thus, pcrI0rmncc 0I p0rII0l0 nccds I0 bc
mcsurcd nd c0mprcd wIh Ihc crlcr 0b|ccIvcs scI I0r Ihc p0rII0l0. Thc
mn Iw0 mcIh0ds 0I mcsurng pcrI0rmncc rc Ihc m0ncywcghIcd nd
Ihc ImcwcghIcd rIcs 0I rcIurn.
2.2.
. !n rclI0n I0 0rdnry shrcs nvcsImcnI, rcIurn n rclIvc Icrms I0r 0nc
ycr mcns:
A. 0vdcnds
. 0vdcnds plus cpIl pprccI0n
C.
ycr Ihc 0I sIrI Ihc I cc Pr
0n pprccI cpIl plus 0vdcnds
299
0.
ycr Ihc 0I sIrI Ihc I cc Pr
0n pprccI cpIl us mn 0vdcnds
E.
ycr Ihc 0I sIrI Ihc I cc Pr
0n dcprccI cpIl us mn 0n pprccI cpIl plus 0vdcnds
2. Thc rsk 0I sccurIy s Ihc __________0I IhI sccurIy
A. SysIcmIc rsk
. UnsysIcmIc rsk
C. Unquc rsk
0. T0Il rsk
E. !dcnIIblc rsk
3. A p0rII0l0 c0mprscs Iw0 sccurIcs X nd Y. whcrc b0 0I Ihc nvcsIblc
sum s puI 0n X nd Ihc blncc 0n Y. !I Ihc cxpccIcd rcIurn 0I X s 20
whlc IhI 0I Y s 30, whI s Ihc p0rII0l0 cxpccIcd rcIurn!
A. b0
. 25
C. 24
0. 20
E. 30
4. Thc rsk 0I p0rII0l0 0I sccurIcs s:
A. Thc vcrgc 0I Ihc rsks 0I Ihc ndvdul sccurIcs
. Thc wcghIcd vcrgc 0I Ihc ndvdul sccurIcs
C. Thc ddI0n 0I Ihc ndvdul sccurIcs' rsks
0. Thc dIIcrcncc bcIwccn Ihc hghcsI nd Ihc l0wcsI m0unIs 0I
Ihc rsks 0I Ihc ndvdul sccurIcs
E. N0I Ihc wcghIcd vcrgc 0I Ihc ndvdul sccurIcs
5. Thc I0ll0wng nI0rmI0n s gvcn b0uI sccurIy. Thc c0rrcllI0n c0
cIIccnI 0I Ihc sccurIy s 0.b0 nd Is I0Il rsk s 20. !I Ihc mrkcI rsk s
0, whI s Ihc sysIcmIc rsk 0I Ihc sccurIy!
A. .20
. 0.0
C. 0.2
0. 0.90
E. 0.b0
2.2.2
. SIIc Iw0 m0sI mp0rInI c0mp0ncnIs 0I sccurIy.
2. Mcn 0r vcrgc 0I ll p0ssblc rcIurns wcghIcd by Ihcr pr0bblIcs s
cllcd _______________
3. !n p0rII0l0 Ihc0ry, whI s IhI mp0rInI rclI0nshp IhI s rcqurcd I0
bc blc I0 c0mpuIc Ihc rsk 0I p0rII0l0
300
4. whcn Iw0 p0rII0l0s 0I sccurIcs lc 0n Ihc cIIccnI Ir0nIcr h0w d0cs
n nvcsI0r dcIcrmncs hs 0r hcr 0pIml p0rII0l0!
5. SIIc IhI mp0rInI rsk chrcIcrsIc IhI dIIcrcnIIcs cpIl sscIs
prcng m0dcl (CAPM) Ir0m p0rII0l0 Ihc0ry.
30
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ Expln Ihc c0nccpIs 0I gr0ss nd ncI w0rkng cpIl,
+ UndcrsInd why w0rkng cpIl s rcqurcd nd h0w I s Innccd,
+ ClculIc Ihc '0pcrIng cyclc' nd 'csh cyclc' 0I c0mpny,
+ SIIc nd cxpln Ihc IcI0rs nIlucncng Ihc w0rkng cpIl rcqurcmcnIs,
+ Kn0w nd Icmsc Ihc dngcrs 0I cxccssvc w0rkng cpIl, nd
+ Expln Ihc wys n whch w0rkng cpIl s Innccd nd Ihc ppr0chcs I0
dcIcrmnng Ihc mx 0I w0rkng cpIl.
Thc crlcr chpIcrs hvc bccn dcv0Icd I0 Ihc IrcImcnI 0I Ihc mngcmcnI
0I Ixcd sscIs nd l0ng Icrm Inncng.
!n Ihs prI, dscuss0ns wll bc I0cuscd 0n w0rkng cpIl mngcmcnI.
Thcrc rc Iw0 c0nccpIs 0I w0rkng cpIl 0r0ss nd NcI.
0r0ss w0rkng cpIl rcIcrs I0 currcnI sscIs whlc Ihc ncI w0rkng cpIl
rcIcrs I0 Ihc dIIcrcncc bcIwccn currcnI sscIs nd currcnI lblIcs. H0wcvcr,
Ihc I0ll0wng dscuss0ns wll cmphssc Ihc ncI currcnI sscIs whch s ls0
kn0wn s ncI w0rkng cpIl s I s m0rc ppr0prIc Ihn Ihc gr0ss w0rkng
cpIl.
CurrcnI sscIs rc Ih0sc sscIs IhI cn bc csly c0nvcrIcd nI0 csh wIhn
sh0rI pcr0d 0I Imc (sy 0nc ycr) nd ncludc: csh, sh0rIIcrm sccurIcs,
dcbI0rs (cc0unIs rcccvblc), blls rcccvblc nd sI0ck (nvcnI0ry). CurrcnI
lblIcs 0n Ihc 0Ihcr hnd rc Ih0sc clms 0I 0uIsdcrs whch rc pyblc
wIhn sh0rI pcr0d 0I Imc (sy 0nc ycr) nd ncludc: crcdI0rs (cc0unIs
pyblc), blls pyblc nd 0uIsIndng cxpcnscs.
302
NcI w0rkng cpIl ndcIcs Ihc lqudIy p0sI0n 0I Ihc Irm nd s such
currcnI sscIs sh0uld bc suIIccnIly n cxccss 0I currcnI lblIcs. !n m0sI
cscs, nlysIs lwys prcIcr c0mpny I0 mnIn Ihc lcvcl 0I currcnI
sscIs I Iwcc Ihc lcvcl 0I currcnI lblIcs, hcncc Ihc 2: rI0 rulc.
A wck lqudIy p0sI0n wll p0sc IhrcI I0 Ihc s0lvcncy 0I c0mpny nd
wll mkc I unsIc nd uns0und. A ncgIvc w0rkng cpIl mcns
ncgIvc lqudIy nd my pr0vc I0 bc hrmIul I0 Ihc rcpuII0n 0I Irm
whlc cxccssvc lqudIy s ls0 bd. ThcrcI0rc, pr0mpI nd Imcly cI0n
sh0uld bc Ikcn by mngcmcnI I ll Imc I0 mpr0vc nd c0rrccI Ihc
nblnccs n Ihc lqudIy p0sI0n 0I Ihc Irm.
!nvcsImcnI n w0rkng cpIl (currcnI sscIs) sh0uld |usI bc dcquIc
bccusc cxccssvc nvcsImcnI mprs pr0IIblIy whlc ndcquIc
nvcsImcnI cn IhrcIcn s0lvcncy s Ihc Irm my n0I bc blc I0 mccI currcnI
0blgI0n. H0wcvcr, Ihcrc s n0 prccsc wy I0 dcIcrmnc Ihc cxcI m0unI
0I w0rkng cpIl I0r Irms sncc Ihc dI nd pr0blcm 0I cch c0mpny rc
dIIcrcnI.
As Ihcrc s n0 prccsc wy I0 dcIcrmnc Ihc cxcI w0rkng cpIl
nccd 0I Irm, Ihcrc s ls0 n0 spccIc rulc s I0 h0w currcnI sscIs
sh0uld bc Innccd. Sncc cvcry c0mpny hs mnmum m0unI 0I
pcrmncnI w0rkng cpIl, p0rI0n 0I Ihc w0rkng cpIl sh0uld
bc Innccd wIh pcrmncnI s0urccs 0I Iunds, such s cquIy, shrc
cpIl, dcbcnIurcs, l0ngIcrm dcbI, prcIcrcncc shrc cpIl 0r
rcIncd crnngs nd Ihc blncc by sh0rI Icrm s0urccs.
!n Ihs rcspccI, I s Ihc c0nsIrnIs 0I Ihc ndvdul c0mpny IhI
sh0uld dcIcrmnc Ihc cpIl mx 0I Ihcr nvcsImcnI n currcnI sscIs
nd n0I Ihc rulc 0I Ihumb sncc w0rkng cpIl nv0lvc c0sI 0I Iunds,
Ihcy sh0uld bc puI I0 pr0ducIvc usc.
Thcrc s hrdly ny busncss Irm whch d0cs n0I rcqurc w0rkng
cpIl. Hcncc, Ihc nccd I0r w0rkng cpIl I0 run Ihc dyI0dy
busncss cIvIcs 0I Irm, cnn0I bc 0vcrcmphsscd.
!n 0rdcr I0r Irm I0 chcvc Ihc wclIh mxmsI0n 0b|ccIvc, I
w0uld hvc I0 crn suIIccnI rcIurn Ir0m Is 0pcrI0ns. T0 bc blc I0
crn sIcdy m0unI 0I pr0II, Irm w0uld hvc I0 nvcsI cn0ugh
Iunds n w0rkng cpIl I0 gcncrIc slcs. CurrcnI sscIs rc nccdcd
bccusc slcs d0 n0I c0nvcrI nI0 csh nsInInc0usly, Ihcrc s lwys
n 0pcrIng cyclc nv0lvcd n Ihc c0nvcrs0n 0I slcs nI0 csh.
303
whI Ihcn s 0pcrIng cyclc! Pndcy (2003) dcIncs 0pcrIng cyclc
s Ihc Imc durI0n rcqurcd I0 c0nvcrI slcs, IIcr Ihc c0nvcrs0n 0I
rcs0urccs nI0 nvcnI0rcs (sI0cks), nI0 csh. Hc IurIhcr dvdcd Ihc
0pcrIng cyclc nI0 Ihrcc phscs, Ihus:
() AcqusI0n 0I rcs0urccs such s rw mIcrls, lb0ur nd
0vcrhcds
(b) MnuIcIurng 0I pr0ducIs. Ths ncludcs c0nvcrs0n 0I rw
mIcrls nI0 w0rk n pr0grcss nd Inshcd g00ds.
(c) Slcs 0I Ihc Inshcd pr0ducI cIhcr I0r csh 0r 0n crcdI (whch
crcIcs cc0unIs rcccvblc).
Thc lcngIh 0I Ihc 0pcrIng cyclc 0I mnuIcIurng Irm s Ihc sum
0I Ihc nvcnI0ry c0nvcrs0n pcr0d nd dcbI0rs c0nvcrs0n pcr0d. Ths
s ls0 rcIcrrcd I0 s gr0ss 0pcrIng cyclcs'.
Thc nvcnI0ry c0nvcrs0n pcr0d s Ihc I0Il Imc nccdcd I0r pr0ducI0n
nd slcs. !I ncludcs: rw mIcrl c0nvcrs0n pcr0d, w0rkn
pr0grcss c0nvcrs0n pcr0d nd Inshcd g00ds c0nvcrs0n pcr0d. Thc
dcbI0rs c0nvcrs0n pcr0d s Ihc Imc rcqurcd I0 c0llccI Ihc
0uIsIndng dcbIs Ir0m cusI0mcrs. H0wcvcr, c0mpny my cqurc
g00ds 0r scrvccs 0n crcdI Ihcrcby p0sIp0nng pymcnI. Thc pcr0d
durng whch pymcnI s p0sIp0ncd s kn0wn s pyblc dcIcrrl
pcr0d. !I s Ihc lcngIh 0I Imc Ihc Irm s blc I0 dcIcr pymcnIs 0n
vr0us purchscs. Thc dIIcrcncc bcIwccn Ihc (gr0ss) 0pcrIng cyclc
nd pyblc dcIcrrl pcr0d s kn0wn s ncI 0pcrIng cyclc 0r csh
c0nvcrs0n cyclc. Thc I0ll0wng I0rmulc cn bc uscd I0r clculIng
Ihc lcngIh 0I cch 0pcrIng cyclc.
dys

3b5
x
n C0nsumpI0 MIcrl Rw
!nvcnI0ry MIcrl Rw
=
dys

3b5
x
0ducI0n Pr 0I C0sI
pr0grcss n w0rk
=
dys

3b5
x
S0ld 000ds 0I C0sI
!nvcnI0ry 000ds Fnshcd
=
304
dys

3b5
x
Slcs CrcdI
) ccvblc Rc Acc0unIs ( 0cbI0rs
=
dys

3b5
x
Purchscs CrcdI
) Pyblc Acc0unIs ( CrcdI0rs
=
Thcrc rc n0 scI rulcs 0r I0rmulc I0 dcIcrmnc Ihc w0rkng cpIl
rcqurcmcnIs 0I Irms. Scvcrl IcI0rs, cch hvng dIIcrcnI mp0rIncc,
nIlucncc w0rkng cpIl nccds 0I Irms. ThcrcI0rc, n nlyss 0I rclcvnI
IcI0rs sh0uld bc mdc n 0rdcr I0 dcIcrmnc I0Il nvcsImcnI n w0rkng
cpIl. Thc IcI0rs rc dcscrbcd s I0ll0ws:
() Thc nIurc 0I Ihc busncss 0I Irm dcIcrmncs
Is w0rkng cpIl rcqurcmcnIs. S0mc c0mpncs rcqurc smll
w0rkng cpIl whlc 0Ihcrs rc w0rkng cpIl nIcnsvc: I0r
cxmplc, rcIl busncsscs nd c0nsIrucI0n Irms nccd I0 nvcsI
subsInIlly n w0rkng cpIl nd n0mnl m0unI n Ixcd sscIs.
0n Ihc 0Ihcr hnd, publc uIlIcs hvc vcry lmIcd nccd I0r w0rkng
cpIl nd hvc I0 nvcsI bundnIly n Ixcd sscIs.
(b) Thc w0rkng cpIl nccds 0I
Irm rc rclIcd I0 Is slcs. !n ddI0n, Ihc vlblIy 0I Iund, Iypc
0I Ihc pr0ducIs nd slcs cnvr0nmcnI hs bcrng 0n Ihc cxIcnI 0I
w0rkng cpIl rcqurcmcnI. Thc clss 0I cusI0mcrs, Ihc prcc nd
qulIy 0I Ihc pr0ducI, Ihc l0cI0n 0I Ihc busncss s wcll s Ihc
clmIc rc s0mc 0I Ihc IcI0rs IhI dcIcrmnc Ihc lcvcl 0I dcmnd.
S0mc pr0ducIs ls0 hvc hgh dcgrcc 0I scs0nl chngcs, I0r
cxmplc, h0usch0ld c0nsumpI0ns.
A gr0wng Irm my nccd I0 nvcsI Iunds n Ixcd sscIs n 0rdcr I0
susIn Is gr0wng pr0ducI0n nd slcs. Ths wll n Iurn ncrcsc
nvcsImcnI n currcnI sscIs I0 supp0rI Ihc cnlrgcd sclc 0I 0pcrI0n.
!I s, IhcrcI0rc, 0I mp0rIncc IhI pr0pcr plnnng bc d0nc by such
Irms I0 Inncc Ihcr ncrcsng nccds I0r w0rkng cpIl. !n ddI0n,
Irms dclng n scs0nl pr0ducIs sh0uld cnsurc IhI Ihcr Inncl
pln 0r rrngcmcnI s Ilcxblc cn0ugh I0 Ikc crc 0I s0mc brupI
scs0nl IlucIuI0ns.
305
(c) Thc pr0ducI0n pr0ccss
hs l0I 0I mpcI 0n Ihc w0rkng cpIl rcqurcmcnI 0I Irm. An
cxIcndcd mnuIcIurng Imc spn mcns lrgcr Icup 0I Iunds n
nvcnI0rcs. Thus, I Ihcrc rc lIcrnIvc Icchn0l0gcs 0I mnuIcIurng
pr0ducI, Ihc Icchn0l0gcl pr0ccss wIh Ihc sh0rIcsI mnuIcIurng
cyclc my bc ch0scn bccusc Ihc l0ngcr Ihc mnuIcIurng cyclc (Imc
lg 0I pr0ducI0n Ir0m Ihc npuI 0I rw mIcrls I0 Inshcd g00ds)
Ihc lrgcr wll bc Ihc Irms w0rkng cpIl rcqurcmcnIs.
(d) Thc crcdI p0lcy 0I Ihc Irm IIccIs Ihc w0rkng cpIl
by nIlucncng Ihc lcvcl 0I dcbI0rs. Evcn Ih0ugh, Ihc crcdI Icrms I0 bc
grnIcd I0 cusI0mcrs my dcpcnd up0n Ihc n0rms 0I Ihc ndusIry I0
whch Ihc Irm bcl0ngs, Ihc Irm hs Ihc IlcxblIy 0I shpng Is crcdI
p0lcy wIhn Ihc c0nsIrnI 0I Ihc ndusIry n0rms nd prcIccs.
!n 0rdcr I0 cnsurc IhI Iunds rc n0I Icd up unncccssrly n dcbI0rs,
Ihc Irm sh0uld I0ll0w rI0nlscd crcdI p0lcy bscd 0n Ihc rclcvnI
IcI0rs. Thc Irm sh0uld d0pI lbcrl crcdI p0lcy sncc hgh
c0llccI0n pcr0d my lcd I0 Icup 0I lrgc Iunds n b00k dcbIs
whlc slck c0llccI0n pr0ccdurc cn ncrcsc Ihc chncc 0I bd dcbIs.
(c) Thc w0rkng cpIl rcqurcmcnIs 0I Irm
rc ls0 IIccIcd by Ihc crcdI Icrms ll0wcd by Is supplcrs. A Irm
wll nccd lcss w0rkng cpIl I lbcrl crcdI Icrms rc vlblc I0
I. Thc vlblIy 0I crcdI Ir0m bnks ls0 nIlucnccs Ihc w0rkng
cpIl rcqurcmcnIs 0I Ihc Irm. A Irm whch cn gcI bnk crcdI
csly 0n Iv0urblc Icrms wll 0pcrIc wIh lcss w0rkng cpIl Ihn
Irm wIh0uI such IclIy.
(I) Thc 0pcrIng cIIccncy 0I Ihc Irm rclIcs I0
Ihc 0pImum uIlsI0n 0I rcs0urccs I mnmum c0sIs. A Irm my bc
blc I0 cIIccnIly c0nIr0l Is 0pcrIng c0sIs nd uIlsng currcnI
sscIs. wIh 0pcrIng cIIccncy (bcIIcr uIlsI0n 0I rcs0urccs .c.
mIcrl, lb0ur nd 0vcrhcds) Ihc usc 0I w0rkng cpIl s mpr0vcd
nd Ihc pcc 0I csh c0nvcrs0n cyclc s ccclcrIcd. Thcrcby mpr0vng
pr0IIblIy nd rcducng prcssurc 0n Ihc w0rkng cpIl.
(g) Prcc lcvcl chngcs s n mp0rInI IcI0r n
dccs0n mkng. Thc ncrcsng shIIs n prcc lcvcl mkc IuncI0ns
0I Ihc Inncl mngcr dIIculI. ThcrcI0rc, g00d Inncl mngcr
sh0uld bc blc I0 nIcpIc Ihc cIIccIs 0I prcc lcvcl chngcs 0n w0rkng
cpIl rcqurcmcnIs 0I Ihc Irm nd mkc dcquIc pr0vs0n I0r I.
A Irm wll rcqurc I0 mnIn hghcr m0unI 0I w0rkng cpIl durng
rsng prcc lcvcls s smc lcvcls 0I currcnI sscIs wll nccd ncrcscd
nvcsImcnIs. H0wcvcr, c0mpncs whch cn mmcdIcly rcvsc Ihcr pr0ducI
prccs wIh rsng prcc lcvcls wll n0I Icc scvcrc w0rkng cpIl pr0blcm.
30b
Thus, cIIccI 0I rsng prccs wll bc dIIcrcnI I0r dIIcrcnI c0mpncs, s0mc
wll Icc n0 w0rkng cpIl pr0blcm whlc w0rkng cpIl pr0blcms 0I 0Ihcrs
my bc ggrvIcd.
w0rkng cpIl mngcmcnI rcIcrs I0 Ihc dmnsIrI0n 0I ll spccIs 0I
currcnI sscIs nmcly csh, mrkcIblc sccurIcs, cc0unIs rcccvblc
(dcbI0rs) nd nvcnI0rcs nd currcnI lblIcs (cc0unIs pyblc, blls
pyblc, bnk 0vcrdrII cIc). Thc Inncl mngcr musI dcIcrmnc lcvcls
0I c0mp0sI0n 0I currcnI sscIs. Hc musI scc IhI rghI s0urccs rc Ippcd I0
Inncc currcnI sscIs nd IhI currcnI lblIcs rc pd n Imc. ThcrcI0rc,
s Ihc lrgcsI p0rI0n 0I Ihc Inncl mngcr's vlublc Imc s dcv0Icd I0
w0rkng cpIl pr0blcms, I s ncccssry I0 mngc w0rkng cpIl n Ihc
bcsI p0ssblc wy I0 gcI Ihc mxmum bcncII.
As I s n0I p0ssblc I0 csImIc w0rkng cpIl nccds ccurIcly, Ihc Irm
musI dccdc b0uI Ihc lcvcls 0I currcnI sscIs I0 bc crrcd. 0vcn Irm's
Icchn0l0gy nd pr0ducI0n p0lcy, slcs nd dcmnd c0ndI0ns, 0pcrIng
cIIccncy cIc Is currcnI sscIs h0ldngs wll dcpcnd up0n Is w0rkng cpIl
p0lcy whch my bc cIhcr c0nscrvIvc 0r ggrcssvc. 0Ih p0lccs nv0lvcs
rskrcIurn Irdc0IIs. A c0nscrvIvc p0lcy mcns l0wcr rcIurn nd rsk
whlc n ggrcssvc p0lcy pr0duccs hghcr rcIurn nd rsk.
Sncc lqudIy nd pr0IIblIy hs bccn dcnIIcd s Ihc Iw0 mp0rInI
ms 0I Ihc w0rkng cpIl mngcmcnI, Irm sh0uld mnIn blncc
bcIwccn Ihc Iw0. LqudIy n Ihs c0nIcxI rcIcrs I0 Ihc Irm's c0nInu0us blIy
I0 mccI mIurng 0blgI0ns whlc pr0IIblIy rcIcrs I0 Ihc Irm's blIy I0
ncrcsc Ihc shrch0ldcr's wclIh.
Mcnwhlc, I0 cnsurc s0lvcncy, Ihc Irm sh0uld bc vcry lqud buI Ihcrc s
c0sI ss0cIcd wIh mnInng s0und lqudIy p0sI0n s c0nsdcrblc
m0unI 0I Ihc Irms wll bc Icd up n currcnI sscIs. T0 Ihc cxIcnI IhI Ihs
nvcsImcnI s dlc, Ihc Irm's pr0IIblIy wll suIIcr.
0n Ihc 0Ihcr hnd, I0 hvc hghcr pr0IIblIy, Ihc Irm my scrIcc s0lvcncy
nd mnIn rclIvcly l0w lcvcl 0I currcnI sscIs. whcn Ihs hppcns, Ihc
Irm's pr0IIblIy wll mpr0vc s lcss Iunds rc Icd up n dlc currcnI sscIs,
buI Ihc s0lvcncy 0I Ihc Irm w0uld bc IhrcIcncd Ihcrcby cxp0sng Ihc Irm
I0 grcIcr rsk 0I csh sh0rIgc nd sI0ck0uI.
() Unncccssry ccumulI0n 0I nvcnI0rcs
(b) !ndcI0n 0I dcIccIvc crcdI p0lcy nd slck c0llccI0n pcr0d.
307
(c) MngcmcnI ncIIccncy
(d) Tcndcnccs 0I ccumulIng nvcnI0rcs Icnd I0 mkc spcculIvc pr0IIs
gr0w.
() !I sIgnIcs gr0wIh s I bcc0mcs dIIculI I0r Ihc Irm I0 undcrIkc
pr0IIblc pr0|ccIs I0r n0nvlblIy 0I w0rkng cpIl Iunds.
(b) !I bcc0mcs dIIculI I0 mplcmcnI 0pcrIng plns nd chcvc Ihc
Irms pr0II IrgcI.
(c) 0pcrIng ncIIccnccs crccp n whcn I bcc0mcs dIIculI cvcn I0
mccI dyI0dy c0mmImcnIs.
(d) Fxcd sscIs rc n0I cIIccnIly uIlscd I0r Ihc lck 0I w0rkng cpIl
Iunds, Ihus, Ihc Irm's pr0IIblIy w0uld dcIcr0rIc.
(c) Sh0rIgc 0I w0rkng cpIl Iunds rcndcr Ihc Irm unblc I0 vl
IIrcIvc crcdI 0pp0rIunIcs.
(I) Thc Irm l0scs Is rcpuII0n whcn I s n0I n p0sI0n I0 h0n0ur Is
sh0rI Icrm 0blgI0n.
)
Thcrc rc Ihrcc m|0r Iypcs 0I Inncng w0rkng cpIl. Thcsc rc: l0ng
Icrm Inncng, sh0rIIcrm Inncng nd sp0nInc0us Inncng.
() Thcsc ncludc 0rdnry shrc cpIl,
prcIcrcncc shrc cpIl, dcbcnIurcs, l0ng Icrm b0rr0wng, rcIncd
crnngs, cIc.
(2) Ths s 0bIncd I0r pcr0d 0I lcss Ihn 0nc
ycr. !I s m0sIly rrngcd Ir0m bnks nd 0Ihcr Inncl nsIIuI0n
n Ihc m0ncy mrkcI. !I my ls0 bc rrngcd Ihr0ugh publc dcp0sIs,
c0mmcrcl ppcr, IcI0rng 0I rcccvblcs cIc.
(3) Ths Iypc 0I sh0rIIcrm Iunds s
uI0mIclly s0urccd nIcrnlly n Ihc c0ursc 0I busncss nd ncludc
Irdc crcdI nd 0uIsIndng cxpcnscs. A Irm s cxpccIcd I0 uIlsc
Ihcsc s0urccs 0I Inncc I0 Ihc IullcsI bcI0rc cmbrkng 0n Ihc 0Ihcr
s0urccs, IhI s l0ngIcrm nd sh0rI Icrm Inncng.
!n 0rdcr I0 dcIcrmnc Ihc mx 0I sh0rIIcrm nd l0ngIcrm s0urccs n Inncng
currcnI sscIs Irm usully I0ll0ws Ihc I0ll0wng ppr0chcs whch rc
308
n0rmlly rcIcrrcd I0 s: mIchng ppr0ch, c0nscrvIvc ppr0ch nd
ggrcssvc ppr0ch.
() !n
Ihs ppr0ch, Ihc Irm uscs l0ngIcrm Inncng I0 Inncc Ixcd sscIs
nd pcrmncnI currcnI sscIs whlc sh0rIIcrm Inncc s uscd I0
Inncc Icmp0rry 0r vrblc currcnI sscIs.
(b) Thc Inncng p0lcy 0I Ihc Irm s sd I0
bc c0nscrvIvc whcn I dcpcnds m0rc 0n l0ngIcrm Iunds I0r Is
Inncng nccds by Inncng Is pcrmncnI sscIs nd ls0 prI 0I
Icmp0rry currcnI sscIs wIh l0ngIcrm Inncng. !n Ihs rcspccI,
Ihc Irm hs lcss rsk 0I Icng Ihc pr0blcm 0I sh0rIgc 0I Iunds buI
w0uld bc lcss pr0IIblc n Icrms 0I c0sI nd IlcxblIy n pymcnI.
(c) Ths p0lcy s sd I0 bc I0ll0wcd by Ihc Irm
whcn I uscs m0rc sh0rIIcrm Inncng Ihn wrrnIcd by Ihc
mIchng ppr0ch. Undcr Ihs p0lcy Ihc Irm Innccs prI 0I Is
pcrmncnI currcnI sscIs wIh sh0rIIcrm Inncng whch mkcs Ihc
Irm I0 bc m0rc rsky.
Thc dscuss0ns b0vc 0n Ihc Ihrcc ppr0chcs Icnds I0wrds Irms d0pIng
blnccd ppr0ch IhI s, Inncng pcrmncnI currcnI sscIs by l0ng
Icrm s0urccs nd Icmp0rry currcnI sscIs by sh0rIIcrm s0urccs 0I Inncc.
0vcrll, Irm sh0uld mnIn blncc bcIwccn lqudIy nd llqudIy
by mnInng s0und w0rkng cpIl p0sI0n. 0Ih cxccssvc s wcll s
ndcquIc w0rkng cpIl p0sI0ns rc dngcr0us. Exccssvc w0rkng
cpIl mcns dlc Iunds whch crn n0 pr0IIs whlc sh0rIgc 0I w0rkng
cpIl n0I 0nly mprs Ihc Irm's pr0IIblIy buI ls0 rcsulIs n pr0ducI0n,
nIcrrupI0n nd ncIIccnccs.
!n ddI0n I0 mnInng blncc bcIwccn lqudIy nd llqudIy,
c0nsdcrI0n 0I sscIs nd Inncng mxcs rc ls0 crucl I0 Ihc w0rkng
cpIl mngcmcnI.
Thc w0rkng cpIl 0I c0mpny s ls0 kn0wn s Is currcnI sscIs. Thc
c0mp0ncnIs rc sI0ck (nvcnI0ry), dcbI0rs (cc0unIs rcccvblc), blls
rcccvblc nd csh. Thc c0mpny's currcnI lblIcs c0nssI 0I clms 0I
0uIsdcrs I0 Ihc c0mpny IhI hvc 0nc ycr 0r lcss I0 g0. Exmplcs rc
crcdI0rs (cc0unIs pyblc), blls pyblc nd 0uIsIndng cxpcnscs. whcn
currcnI lblIcs Igurc s dcducIcd Ir0m Ihc Igurc 0I currcnI sscIs, Ihc
rcsulI s kn0wn s ncI w0rkng cpIl.
309
w0rkng cpIl s rcqurcd I0r c0mpny's survvl n Ihc sh0rIrun. !I s
rcIlccI0n 0I Ihc lqudIy p0sI0n 0I Ihc c0mpny. !I sh0ws Ihc cxIcnI I0 whch
c0mpny s blc I0 mccI Is dyI0dy Inncl 0blgI0ns nd Ikc
dvnIgc 0I 0pp0rIunIcs. A c0mpny musI mnIn blnccd
rclI0nshp bcIwccn Ihc c0mp0ncnIs 0I Is w0rkng cpIl. T0 Ihs cnd I
sh0uld, I ny p0nI n Imc, kn0w Is '0pcrIng cyclc' nd 'csh cyclc'. F0r
mnuIcIurng c0mpny Ihc 0pcrIng cyclc s Ihc pcr0d 0I Imc I Ikcs
c0mpny I0 c0nvcrI Ihc cqusI0n 0I rw mIcrls I0 csh IhI s Ir0m Ihc
dy Ihc rw mIcrls wcrc b0ughI I0 Ihc dy csh s rcccvcd Ir0m dcbI0rs.
whcn Ihc m0unI 0I Imc Ikcn I0 py crcdI0r s rcm0vcd, Ihcrc s Ihcn whI
s Icrmcd Ihc 'csh cyclc'.
!n ddI0n I0 kn0wng Is 0pcrIng nd csh cyclcs, c0mpny sh0uld bc
blc I0 dcIcrmnc Is w0rkng cpIl rcqurcmcnIs. Thc IcI0rs I0 c0nsdcr n
dcIcrmnng such rcqurcmcnIs ncludc Ihc nIurc 0I Ihc busncss, Ihc slcs
nd dcmnd c0ndI0ns, Ihc Icchn0l0gy nd mnuIcIurng p0lcy, Ihc crcdI
p0lcy nd s0 0n.
A c0mpny musI Iry I0 mnIn n 0pImum blncc 0I Is w0rkng cpIl
p0sI0n. !I mghI mnIn n ggrcssvc 0r c0nscrvIvc w0rkng cpIl
p0lcy. whIcvcr p0lcy IhI s d0pIcd nv0lvcs Irdc 0II bcIwccn rsk nd
rcIurn, IhI s, bcIwccn lqudIy nd pr0IIblIy.
Thc Inncng 0I w0rkng cpIl s ls0 n mp0rInI c0rp0rIc dccs0n.
Fnncng my bc l0ngIcrm, sh0rIIcrm 0r sp0nInc0us. Thcrc rc ppr0chcs
usully d0pIcd n 0rdcr I0 dcIcrmnc Ihc mx 0I Ihcsc s0urccs 0I Inncc.
Thcsc rc Ihc mIchng ppr0ch, Ihc c0nscrvIvc ppr0ch nd Ihc
ggrcssvc ppr0ch.
22.b.
. Thc I0ll0wng rc Ihc mn c0mp0ncnIs 0I w0rkng cpIl EXCEPT:
A SI0ck
0cbI0rs
C CrcdI0rs
0 nk 0vcrdrII
E nk l0n
2. Csh cyclc s:
() 0pcrIng cyclc
() 0pcrIng cyclc pyblc dcIcrrl pcr0d
() 0pcrIng cyclc + pyblc dcIcrrl pcr0d
30
A () 0nly
() 0nly
C () 0nly
0 () nd ()
E () nd ()
3. whch IcI0r d0cs n0I drccIly nIlucncc Ihc lcvcl 0I I0Il nvcsImcnI n
w0rkng cpIl!
A NIurc 0I busncss
Slcs nd dcmnd c0ndI0n
C MrkcIng p0lcy
0 AvlblIy 0I crcdI
E CrcdI p0lcy
4. !I c0mpny's sscIs c0uld n0I mccI Is lblIcs, I mcns Ihc c0mpny
s
() llqud
() ns0lvcnI
() unpr0IIblc
A () 0nly
() nd ()
C () nd ()
0 () 0nly
E () 0nly
5 whI s mIchng c0nccpI!
() Sh0rI Icrm Inncc s uscd I0 Inncc l0ngIcrm sscIs
() CurrcnI sscIs rc Innccd wIh currcnI lblIcs
() CurrcnI sscIs rc Innccd by l0ngIcrm Inncc
A () 0nly
() nd ()
C () 0nly
0 () nd ()
E () 0nly
22.b.2
1. whI s w0rkng cpIl!
2. whI s sp0nInc0us Inncng!
3. H0w s Ihc 0pcrIng cyclc 0I mnuIcIurng c0mpny dcIcrmncd!
4. whI s Ihc mp0rIncc 0I w0rkng cpIl I0 Ihc Inncl mngcr!
5. whI s 0vcrIrdng!
3
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ UndcrsInd Ihc m0Ivcs I0r h0ldng csh nd Ihc mngcmcnI 0I csh,
+ Expln Ihc Icchnquc 0I csh plnnng wIh rcspccI I0 csh budgcI prcprI0n,
+ !dcnIIy nd dscuss Ihc csh I0rccsIng Icchnqucs vlblc I0 c0mpny,
+ SIIc nd dscuss csh c0llccI0n nd pymcnI mcIh0ds I0r cIIccnI csh c0nIr0l,
+ Expln Ihc mcIh0ds I0r dcIcrmnng 0pImum csh blncc undcr ccrInIy nd
unccrInIy, nd
+ 0scuss ssucs n rcspccI 0I nvcsIng surplus csh n mrkcIblc sccurIcs.
Thc mp0rIncc 0I csh I0 busncss cnn0I bc 0vcrcmphsscd. !I s Ihc
m0sI mp0rInI currcnI sscI I0r Ihc sm00Ih 0pcrI0ns 0I busncss. F0r
busncss I0 run 0n c0nInu0us bss, I sh0uld kccp suIIccnI csh, ncIhcr
m0rc n0r lcss, sncc csh sh0rIgc dsrupIs Ihc Irm's 0pcrI0n whlc cxccssvc
csh wll smply rcmn dlc wIh0uI c0nIrbuIng nyIhng I0wrds Ihc Irm's
pr0IIblIy. F0r Ihcsc rcs0ns, Ihc m|0r IuncI0n 0I Ihc Inncc mngcr
wll bc I0 mnIn s0und csh p0sI0n. Thc Icrm csh ncludcs: c0ns,
currcncy nd chcqucs hcld by Ihc Irm nd blnccs n Is bnk cc0unIs.
S0mcImcs ncrcsh Icms, such s, mrkcIblc sccurIcs 0r Imc dcp0sIs
rc ls0 ncludcd.
why d0 Irms nccd I0 h0ld csh! Thc Irm's nccd I0 h0ld csh rc cIcg0rscd
nI0 Ihrcc by Ihc cc0n0msI s I0ll0ws: IrnscI0ns m0Ivc, prccuI0nry
m0Ivc nd spcculIvc m0Ivc.
() Ths rcqurcs Irm I0 h0ld csh I0 c0nducI Is
busncss n Ihc 0rdnry c0ursc. N0rmlly, Ihc Irm nccds csh
prmrly I0 py I0r purchscs, slrcs nd wgcs, Ixcs, cIc. H0wcvcr,
Ihc nccd I0 h0ld csh w0uld n0I rsc I Ihcrc wcrc pcrIccI
synchr0nsI0n bcIwccn csh rcccpIs nd csh pymcnIs, IhI s,
cn0ugh csh s rcccvcd 0r vlblc whcn pymcnIs rc I0 bc mdc.
uI sncc csh rcccpIs nd pymcnIs rc n0I pcrIccIly synchr0nscd,
Ihc Irm sh0uld mnIn s0mc csh blncc I0 bc blc I0 mkc
rcqurcd pymcnIs whcn csh pymcnIs cxcccd csh rcccpIs.
32
(2) Ths s Ihc Irms nccd I0 h0ld csh I0 mccI
IuIurc c0nIngcnccs. !I pr0vdcs cush0n 0r buIIcr I0 wIhsInd s0mc
uncxpccIcd cmcrgcncy. Thc m0unI rcqurcd I0r Ihs purp0sc dcpcnds
up0n Ihc prcdcIblIy 0I csh Il0ws nd s ls0 nIlucnccd by Ihc
Irms' blIy I0 b0rr0w I sh0rI n0Icc whcn Ihc nccd rscs.
(3) Thc spcculIvc m0Ivc rclIcs I0 Ihc h0ldng
0I csh I0r nvcsImcnI n pr0II mkng 0pp0rIunIcs s nd whcn
Ihcy rsc. Thc 0pp0rIunIy I0 mkc pr0II my rsc whcn Ihc sccurIy
prccs chngc. Thc Irm my h0ld csh whcn I s cxpccIcd IhI nIcrcsI
rIcs wll rsc nd sccurIy prccs wll Ill 0r whcn I s cxpccIcd IhI
mIcrls' prcc wll Ill.
H0wcvcr, busncss Irms d0 n0I n0rmlly cnggc n spcculI0ns. Thus, Ihc
prmry m0Ivcs I0 h0ld csh nd mrkcIblc sccurIcs rc: Ihc IrnscI0ns
nd prccuI0nry m0Ivcs.
Csh mngcmcnI s c0nccrncd wIh Ihc mngng 0I csh nIl0ws, csh
0uIIl0ws nd csh blnccs hcld by Ihc Irm I p0nI n Imc. !I s dIIculI
I0 prcdcI csh Il0ws ccurIcly prIculrly Ihc nIl0ws. !n ddI0n Ihcrc s
n0 pcrIccI c0ncdcncc bcIwccn Ihc nIl0ws nd Ihc 0uIIl0ws 0I csh. !n 0rdcr
I0 rcs0lvc Ihc unccrInIy b0uI csh Il0w prcdcI0n nd lck 0I
synchr0nsI0n bcIwccn csh rcccpIs nd pymcnIs, Ihcrc s nccd I0r
Irm I0 dcvcl0p ncccssry sIrIcgcs I0r csh mngcmcnI. Thc Irm sh0uld
IhcrcI0rc cv0lvc ppr0prIc sIrIcgcs n Ihc I0ll0wng rc 0I csh
mngcmcnI.
() Csh nIl0ws nd 0uIIl0ws sh0uld bc plnncd I0
pr0|ccI csh surplus 0r dcIcI I0r cch 0I Ihc plnnng pcr0d IhI s
prcprI0n 0I csh budgcI.
(b) Thc Il0w 0I csh sh0uld bc pr0pcrly
mngcd.
(c) Thc Irm sh0uld dccdc b0uI Ihc ppr0prIc
lcvcl 0I csh blnccs.
(d) Thc surplus csh blnccs sh0uld bc
pr0pcrly nvcsIcd I0 crn pr0IIs.
23.3.
Csh plnnng s Icchnquc I0 pln nd c0nIr0l Ihc usc 0I csh. !I
nv0lvcs dcvcl0png pr0|ccIcd csh sIIcmcnI Ir0m I0rccsI 0I
33
cxpccIcd csh nIl0ws nd 0uIIl0ws I0r gvcn pcr0d. Thc I0rccsIs
my bc bscd 0n Ihc prcscnI 0pcrI0n 0r Ihc nIcpIcd IuIurc
0pcrI0n. !I my bc d0nc 0n dly, wcckly 0r m0nIhly bss. Ths
dcpcnds 0n Ihc szc 0I Ihc Irm nd Ihc phl0s0phy 0I Is mngcmcnI.
()
Thc m0sI mp0rInI I00l I0 pln I0r nd c0nIr0l csh rcccpIs
nd pymcnIs s Ihc csh budgcI. Acc0rdng I0 wcsI0n nd
C0pclnd (98b) csh budgcI s summry sIIcmcnI 0I Ihc
Irms cxpccIcd csh nIl0ws nd 0uIIl0ws 0vcr pr0|ccIcd Imc
pcr0d. !I gvcs nI0rmI0n 0n Ihc Imng nd mgnIudc 0I
cxpccIcd csh Il0ws nd csh blnccs 0vcr Ihc pr0|ccIcd pcr0d.
Ths nI0rmI0n hclps Ihc Inncl mngcr I0 dcIcrmnc Ihc
IuIurc csh nccds 0I Ihc Irm, pln I0r Ihc Inncng 0I Ihcsc
nccds nd cxcrcsc c0nIr0l 0vcr Ihc csh nd lqudIy 0I Ihc
Irm.
Thc Imc h0rz0n 0I csh budgcI dIIcrs Ir0m Irm I0 Irm.
Csh I0rccsIs rc nccdcd I0 prcprc csh budgcIs nd Ihs
my bc d0nc 0n sh0rI 0r l0ngIcrm bss. F0rccsI c0vcrng
pcr0ds 0I 0nc ycr 0r lcss rc c0nsdcrcd sh0rI Icrm whlc Ih0sc
cxIcndng bcy0nd 0nc ycr rc c0nsdcrcd l0ng Icrm. Thc m0sI
c0mm0nly uscd mcIh0ds 0I sh0rIIcrm csh I0rccsIng rc.
() Thc rcccpIs nd dsburscmcnIs (pymcnIs) mcIh0d, nd
() Thc d|usIcd ncI nc0mc mcIh0d.
Thc rcccpI nd pymcnIs mcIh0d s gcncrlly cmpl0ycd I0
I0rccsI I0r lmIcd pcr0ds such s wcck 0r m0nIh whlc
Ihc d|usIcd ncI nc0mc mcIh0d s prcIcrrcd I0r l0ngcr durI0ns
rngng bcIwccn Icw m0nIhs I0 ycr. 0Ih mcIh0ds hvc
Ihcr mcrI nd dcmcrIs.
!n Ihc csc 0I rcccpIs nd dsburscmcnIs ppr0ch, Ihc csh
Il0ws cn bc c0mprcd wIh budgcIcd nc0mc nd cxpcnsc
Icms whlc Ihc d|usIcd ncI nc0mc ppr0ch sh0ws
c0mpny's w0rkng cpIl nd IuIurc Inncng nccds.
(b)
Thc prmc m 0I Ihs mcIh0d s I0 summrsc Ihc csh nIl0ws
nd csh 0uIIl0ws, durng prcdcIcrmncd pcr0d. !I s smply
cllcd Ihc csh budgcI. Thc IrsI sIcp n Ihc prcprI0n 0I
csh budgcI s Ihc csImIc 0I csh nIl0ws. Thrcc br0d s0urccs
0I csh nIl0ws cn bc dcnIIcd. Thcsc rc: 0pcrIng, n0n
34
0pcrIng nd Inncl. Csh slcs nd c0llccI0ns I0rm Ihc
m0sI mp0rInI prI 0I Ihc 0pcrIng csh nIl0ws whlc Ihc
n0n0pcrIng csh Il0ws ncludc slc 0I 0ld sscIs, dvdcnd
nd nIcrcsI nc0mc. Thc Inncl s0urccs ncludc b0rr0wngs
nd ssuncc 0I sccurIcs.
Thc ncxI sIcp n Ihc prcprI0n 0I csh budgcI, s Ihc csImIc
0I csh 0uIIl0ws nd Ihs ncludc:
() 0pcrIng 0uIIl0ws IhI s csh purchscs, pymcnIs
cc0unIs pyblcs, wgcs nd slrcs, cIc
() CpIl cxpcndIurcs,
() c0nIrcIul pymcnIs such s rcpymcnI 0I l0n nd
nIcrcsI chrgcs, Ix pymcnIs, cIc, nd
(v) dscrcI0nry pymcnIs such s 0rdnry nd prcIcrcncc
dvdcnd.
0ncc Ihc I0rccsIs I0r csh rcccpIs nd pymcnIs hvc bccn
dcvcl0pcd, Ihcy cn bc c0mbncd I0 0bIn Ihc ncI csh nIl0w
0r 0uIIl0ws I0r cch pcr0d nd Ihs w0uld ndcIc whcIhcr
Ihc Irm hs cxccss csh 0r dcIcI. Thc pck csh rcqurcmcnIs
w0uld bc ndcIcd. !I Ihc Irm hs p0lcy 0I mnInng
mnmum csh blncc, rrngcmcnI musI bc mdc I0
mnIn Ihs mnmum by b0rr0wng Ir0m bnks n pcr0ds
0I dcIcI.
AlIcrnIvcly, Ihc Irm cn dcly Is cpIl cxpcndIurc 0r
pymcnIs I0 crcdI0rs 0r p0sIp0nc pymcnI 0I dvdcnds.
0vcn Ihc I0ll0wng csImIcs, prcprc csh budgcI I0r Fdcls Ayu Plc I0r
pcr0d 0I sx m0nIhs Ir0m 1n 2009.
. Prccs nd c0sIs rc ssumcd I0 rcmn unchrgcd
2. CrcdI slcs rc cxpccIcd I0 bc 80 pcrccnI 0I I0Il slcs
3. b0 pcrccnI 0I crcdI slcs rc I0 bc c0llccIcd IIcr 0nc m0nIh .c. Ihc
m0nIh IIcr Ihc slc nd 20 pcrccnI IIcr Iw0 m0nIhs nd 20 pcrccnI
IIcr Ihrcc m0nIhs.
4. AcIul nd I0rccsI slcs rc s I0ll0ws:
35
AcIul N'000 F0rccsI N'000
0cI 2008 2,000 1n 2009 0,000
N0v 2008 4,000 Fcb 2009 8,000
0cc 2008 b,000 Mr 2009 0,000
Aprl 2009 b,000
My 2009 0,000
1unc 2009 8,000
1uly 2009 2,000
5. Thc c0mpny cxpccIs pr0II mrgn 0I 25 pcrccnI 0n slcs.
b. AnIcpIcd slcs 0I cch m0nIh rc purchscd nd pd
m0nIh bcI0rc Ihc slc.
7. Thc csImIcd 0pcrIng cxpcnscs rc s I0ll0ws:
N'000 N'000
1n 2,000 Aprl 3,000
Fcb ,500 My 2,050
Mr 2,500 1unc 3,200
Thcsc rc pd n Ihc m0nIh n whch Ihcy rc ncurrcd.
8. !nIcrcsI 0n 0 pcrccnI dcbcnIurc s I0 bc pd hlIycrly
9. C0mpny Ix 0I N2 mll0n s duc n Mrch
0. Purchsc 0I mchncry s I0 bc mdc n My
. Thc c0mpny hs csh blncc 0I N5 mll0n s I 3sI
0cccmbcr 2008. Thc c0mpny h0pcs I0 mnIn mnmum
blncc 0I N5 mll0n Ir0m Ihc bcgnnng 0I Fcbrury 2009.
Funds cn bc b0rr0wcd 0n m0nIhly bss I 20 pcrccnI pcr
nnum n csc 0I nccd.
3b
2. !nIcrcsI 0n Ihc b0rr0wcd Iund s pyblc 0n Ihc IrsI 0I Ihc m0nIh
IIcr Ihc b0rr0wng.
3. Thc sum 0I N0 mll0n s pyblc s rcnI 0n m0nIhly bss.
N
T0Il slcs 0,000 8,000 0,000 b,000 0,000 8,000
CrcdI slcs (80 0I slcs) 8,000 b,400 8,000 4,800 8,000 b,400
Csh slcs 2,000 ,b00 2,000 ,200 2,000 ,b00
0nc m0nIh b0 7,b80 4,800 3,840 4,800 2,880 4,800
Tw0 m0nIhs 20 2,240 2,5b0 ,b00 ,280 ,b00 9b0
Thrcc m0nIhs 20 ,920 2,240 2,5b0 ,b00 ,280 ,b00
T0Il !nIl0ws (A) 3,840 ,200 0,000 8,880 7,7b0 8,9b0
N
Purchscs 75 0I slcs b000 7,500 4,500 7,500 b,000 9,000
RcnI ,000 ,000 ,000 ,000 ,000 ,000
0pcrIng cxpcnscs 2,000 ,500 2,500 3,000 2,050 3,200
EqupmcnI 8,000
!nIcrcsI 0n dcbI 5 500
C0mpny Ix 2,000
T0Il 0uIIl0ws 9,000 0,000 0,000 ,500 7,050 3,700
NcI csh Il0ws (NCP) 4,840 ,200 (2,b20) (9,290) (4,740)
cgnnng 0I m0nIh 5,000 9,840 ,040 ,040 8,420 5,30
cgnnng 0I b0rr0wngs b,000 5,000
!nIcrcsI 0n b0rr0wngs (00)
RcpymcnI 0I b0rr0wngs
T0Il cnd 0I m0nIhs csh 9,840 ,040 ,040 8,420 5,30 5,290
37
() !I gvcs c0mplcIc pcIurc 0I ll Ihc Icms 0I cxpccIcd
csh Il0ws .c. csh nIl0ws nd csh 0uIIl0ws.
() !I hclps Irm I0 mngc Is csh p0sI0n.
() !Is rclblIy s rcduccd bccusc 0I Ihc unccrInIy 0I
csh I0rccsIs.
() !I Ils I0 hghlghI Ihc sgnIcnI m0vcmcnI n Ihc
w0rkng cpIl Icms.
(c)
Ths mcIh0d nv0lvcs Ihc Ircng 0I w0rkng cpIl Il0ws. !I s
s0mcImcs cllcd Ihc s0urccs nd uscs ppr0ch nd I s 0nc
0I Ihc sIIcmcnIs n publshcd cc0unI.
() !I hghlghIs Ihc m0vcmcnIs n Ihc w0rkng cpIl Icms
nd Ihcrcby hclps I0 kccp c0nIr0l 0n Irm's w0rkng
cpIl
() !I hclps n nIcpIng Irm's Inncl rcqurcmcnI.
!I Ils I0 Ircc csh Il0ws nd IhcrcI0rc Is uIlIy n c0nIr0llng
dly csh 0pcrI0n s lmIcd.
0ncc Ihc csh budgcI s prcprcd nd ppr0prIc csh Il0w csIblshcd, Ihc
Inncl mngcr sh0uld cnsurc IhI Ihcrc s n0 sgnIcnI vrncc bcIwccn
Ihc pr0|ccIcd csh Il0ws nd Ihc cIul csh Il0ws. T0 bc blc I0 chcvc Ihs,
rcqurcs n cIIccnI csh mngcmcnI Ihr0ugh pr0pcr c0nIr0l 0I csh
c0llccI0n nd dsburscmcnI. Thc 0b|ccIvc sh0uld bc I0 ccclcrIc csh
c0llccI0n s much s p0ssblc nd dcccclcrIc 0r dcly csh dsburscmcnIs
s much s p0ssblc.
38
A Irm cn c0nscrvc csh nd rcducc Is csh rcqurcmcnI pr0vdcd
I c0uld spccd up Is csh c0llccI0n. Csh c0llccI0n cn bc ccclcrIcd
by Ihc usc 0I:
+ L0ck b0xcs,
+ L0cl dcp0sI0ry bnk, nd
+ Csh IrnsIcr sysIcms ncludng cpymcnIs.
()
Ths rrngcmcnI rcqurcs Ihc Irms I0 0rgnsc c0llccI0n 0I
csh by hvng rcmIInccs mlcd drccIly I0 p0sI 0IIcc b0x
IhI s 0pcncd by bnk. Chcqucs rc mlcd I0 Ihc l0cl p0sI
0IIcc b0x mnIncd by l0cl bnk nsIcd 0I bcng scnI I0
Ihc hcdqurIcr 0I Ihc Irm. Thc usc 0I l0ck b0xcs spccds Ihc
c0llccI0n 0I chcqucs s wcll s Ihc m0vcmcnI 0I rcmIInccs,
sncc Ihc chcqucs rc dcp0sIcd bcI0rc, rIhcr Ihn IIcr, Ihc
cc0unIng s d0nc. H0wcvcr, whcrc smll m0unIs rc
nv0lvcd, Ihc c0sI 0I l0ck b0x my 0uIwcgh Is bcncIIs.
(b)
Ths s vcry smlr I0 l0ck b0xcs Icchnquc. !n Ihs sysIcm,
l0cl bnks rc pp0nIcd s c0llccI0n ccnIrcs. CusI0mcrs rc
drccIcd I0 py I0 Ihc pp0nIcd l0cl bnk whcrc IrnsIcrs rc
mdc I0 Ihc c0mpny's hcdqurIcrs cc0unI. Slcs cxccuIvcs
c0uld ls0 bc drccIcd I0 c0llccI chcqucs Ir0m Ihc cusI0mcrs
nd py drccIly I0 Ihc pp0nIcd l0cl bnks.
(c)
CusI0mcrs rc gvcn Ihc Irms cc0unI numbcr I0 whch
pymcnIs rc I0 bc mdc I0r drccI crcdI I0 Ihc c0mpny's
cc0unI. H0wcvcr, Icchn0l0gy hs mpr0vcd s0 much IhI Ihc
ssuc 0I csh c0llccI0n hs bccn mdc vcry csy. Thc pr0blcm
hs bccn rcduccd whlc Ihc clcrcl IuncI0n hs bccn prIly
IrnsIcrrcd I0 Ihc bnks. Ths hs hclpcd n rcducng c0sI,
mpr0vc nIcrnl c0nIr0l nd rcducc Ihc p0ssblIy 0I Irud.
Thc cIIccIvc c0nIr0l 0I csh dsburscmcnI cn hclp Ihc Irm n
c0nscrvng csh nd rcducng Ihc Inncl rcqurcmcnIs. Thc Irm
39
sh0uld mkc pymcnIs usng crcdI Icrms I0 Ihc IullcsI cxIcnI sncc
Ihcrc s n0 dvnIgc n pyng s00ncr Ihn grccd. y dclyng
pymcnI s much s p0ssblc, Ihc Irm wll bc blc I0 mkc mxmum
usc 0I Irdc crcdI. Ths my, h0wcvcr, cndngcr Ihc Irm's crcdI
w0rIhncss. !n ddI0n, Ihc supplcr my buld mplcI c0sIs n Ihc
prccs 0I Ihc g00ds supplcd, Thus, kccpng n vcw Ihc n0rms 0I Ihc
ndusIry, Ihc Irm sh0uld py wIhn Ihc Icrm 0IIcrcd by Ihc supplcr
sncc pyng crly my n0I ncccssrly rcsulI n ny subsInIl
dvnIgc I0 Ihc Irm unlcss csh dsc0unIs rc 0IIcrcd.
whlc I0r ccclcrIcd c0llccI0ns, dcccnIrlscd c0llccI0n pr0ccdurc
my bc I0ll0wcd, I0r pr0pcr c0nIr0l 0I dsburscmcnIs ccnIrlscd
sysIcm my bc dvnIgc0us.
0nc 0I Ihc prmry rcsp0nsblIcs 0I Ihc Inncl mngcr s I0 mnIn
s0und lqudIy p0sI0n 0I Ihc Irm. Ths hc d0cs by cnsurng IhI Ihcrc s
vlblIy 0I csh I0 mccI Ihc Irm's 0blgI0n whcn Ihcy bcc0mc duc.
A Irm mnIns Ihc 0pcrIng csh blncc I0r IrnscI0n purp0sc. !I my
ls0 crry ddI0nl csh s buIIcr. Thc m0unI 0I csh blncc wll dcpcnd
0n Ihc rskrcIurn Irdc0II. !I Ihc Irm mnIns smll csh blncc, Is
lqudIy p0sI0n wckcns, buI Is pr0IIblIy mpr0vcs s Ihc rclcscd Iunds
cn bc pr0IIbly nvcsIcd. 0n Ihc 0Ihcr hnd, I Ihc Irm kccps hgh csh
blncc, I wll hvc sIr0ng lqudIy p0sI0n buI l0w pr0IIblIy sncc Ihc
p0IcnIl pr0II I0rcg0nc 0n h0ldng lrgc csh blncc s n 0pp0rIunIy
c0sI I0 Ihc Irm. ThcrcI0rc, Ihc Irm sh0uld mnIn 0pImum |usI cn0ugh
csh blncc.
Ths m0dcl c0nsdcrs csh mngcmcnI smlr I0 n nvcnI0ry
mngcmcnI pr0blcm. !I pr0vdcs I0rml ppr0ch I0r dcIcrmnng
Irm's 0pImum csh blncc undcr ccrInIy. !I IIcmpIs I0 mnmzc
Ihc sum 0I Ihc c0sI 0I h0ldng csh nd Ihc c0sI 0I c0nvcrIng
mrkcIblc sccurIcs I0 csh.
!I s bscd 0n Ihc I0ll0wng ssumpI0ns:
() Thc Irm s blc I0 I0rccsI Is csh nccds wIh ccrInIy.
(b) Thc Irm's csh pymcnI 0ccur unI0rmly 0vcr pcr0d 0I Imc.
(c) Thc 0pp0rIunIy c0sI 0I h0ldng csh s kn0wn nd I d0cs n0I
chngc 0vcr Imc.
320
(d) Thc Irm wll ncur Ihc smc IrnscI0n c0sI whcncvcr I c0nvcrIs
sccurIcs I0 csh.
Thc I0rmul I0r Ihc 0pImum csh blncc s s I0ll0ws:
0pImum csh blncc =
k
cT 2
C* =
k
cT 2
:
C* s Ihc 0pImum csh blncc
c s Ihc c0sI pcr IrnscI0n
T s Ihc I0Il csh nccdcd durng Ihc ycr
k s Ihc 0pp0rIunIy c0sI 0I h0ldng csh blncc
Thc m0dcl s sh0wn grphclly s I0ll0ws:
C*
C0sI
0
Csh blncc
TrnscI0n
C0sI
H
0
l
d

n
g
C
0
s
I
T
0
I

l
C
0
s
I
bIundc Fshcry Plc csImIcs Is I0Il csh rcqurcmcnI s N5 mll0n n
2009. Ihc c0mpny's 0pp0rIunIy c0sI 0I Iunds s puI I 20 pcr ccnI pcr nnum.
Thc c0mpny nIcpIcs IrnscI0n c0sI 0I 0.0 pcr ccnI 0I csh
rcqurcmcnI pcr IrnscI0n whcncvcr I c0nvcrIs Is sh0rIIcrm sccurIcs I0
csh. 0cIcrmnc Ihc 0pImum csh blncc
32
0pImum csh blncc =
k
cT 2
* C . c .
k
cT 2
=
whcrc
C* Thc 0pImum csh blncc
c s Ihc c0sI pcr IrnscI0n
T s Ihc I0Il csh nccdcd durng Ihc ycr
k s Ihc 0pp0rIunIy c0sI 0I h0ldng csh
ThcrcI0rc C* =
( )
20 . 0
mll0n 5 mll0n 5 0I 0 . 0 2
=
20 . 0
mll0n 5 x 500 x 2
=
Thc lmII0n 0I Ihc um0l m0dcl s IhI Ihc csh Il0ws IlucIuIc.
H0wcvcr, Irms n prcIcc d0 n0I usc Ihcr csh blncc unI0rmly n0r
rc Ihcy blc I0 prcdcI dly csh nIl0ws nd 0uIIl0w. Thc Mllcr0rr
m0dcl 0vcrc0mcs Ihs sh0rIc0mng nd ll0ws I0r dly csh Il0w
vrI0n.
!I ssumcs IhI ncI cshIl0ws rc n0rmlly dsIrbuIcd wIh zcr0
vluc 0I mcn nd sIndrd dcvI0n.
Thc I0rmul I0r dcIcrmnng Ihc dsIncc bcIwccn uppcr nd l0wcr
c0nIr0l lmIs cllcd Z s s I0ll0ws:
Uppcr lmI L0wcr lmI = x TrnscI0n c0sI x csh Il0w vrncc
Uppcr lmI L0wcr lmI = x TrnscI0n c0sI x csh Il0w vrncc/
!nI. rIc)

/
3
.
Z =
( )
3

c
x
4
3 o
Uppcr lmI = L0wcr lmI 3z
RcIurn p0nI = L0wcr lmI + z
N N
N N
322
Avcrgc csh blncc = l0wcr lmI + 4/3z
whcrc:
c = Ihc IrnscI0n c0sI
= Ihc nIcrcsI rIc
o = Ihc sIndrd dcvI0n 0I ncI csh Il0ws.
A Irm h0lds cxIr csh I0 mccI unprcdcIblc Inncl nccds m0rc s0 whcn
csh Il0ws cnn0I bc prcdcIcd wIh ccrInIy. Thc csh s0 hcld s cllcd Ihc
prccuI0nry blncc nd s usully nvcsIcd n Ihc sh0rIIcrm m0ncy mrkcI
nsIrumcnIs.
!nsIcd 0I h0ldng cxccss csh I0r prccuI0nry blncc, Ihc Irm my mccI
Is prccuI0nry rcqurcmcnIs s nd whcn Ihcy rsc, by sh0rIIcrm
b0rr0wngs. Thc ch0cc bcIwccn h0ldng lqud sscIs nd sh0rI Icrm
b0rr0wngs wll dcpcnd up0n Ihc Irms p0lcy rcgrdng Ihc mx 0I sh0rI
Icrm Inncng. Evcn Ih0ugh, numbcr 0I mrkcIblc sccurIcs my bc
vlblc n Ihc mrkcI, Ihc Inncc mngcr musI dccdc b0uI Ihc p0rII0l0
0I mrkcIblc sccurIcs n whch Ihc Irms surplus csh sh0uld bc nvcsIcd.
!n ch00sng m0ng lIcrnIvc nvcsImcnIs, Ihc Irm sh0uld cxmnc Ihc
Ihrcc bsc IcIurcs 0I sccurIy, IhI s, sIcIy, mIurIy nd mrkcIblIy.
Thc Irm w0uld bc nIcrcsIcd n rcccvng hgh rcIurn 0n Is nvcsImcnI s
much s p0ssblc buI Ihc hghcr Ihc rcIurn, Ihc hghcr Ihc rsk. ThcrcI0rc, Ihc
Irm w0uld lkc I0 nvcsI n vcry sIc sccurIcs s Ihc csh blncc nvcsIcd
n Ihcm s nccdcd n Ihc ncr IuIurc. Thus, Ihc Irm w0uld Icnd I0 nvcsI n
Ihc hghcsI ycldng mrkcIblc sccurIcs sub|ccI I0 Ihc c0nsIrnI IhI Ihc
sccurIcs hvc cccpIblc lcvcl 0I rsk.
!n ddI0n, Ihc Irm w0uld lkc I0 c0nsdcr Ihc mIurIy 0I Ihc nvcsImcnI n
0rdcr I0 nvcsI Is cxccss csh 0n sh0rI Icrm sccurIcs I0r sIcIy rcs0ns.
Fnlly, Ihc c0nvcncncc nd spccd wIh whch Ihc sccurIy cn bc c0nvcrIcd
I0 csh w0uld bc c0nsdcrcd. As Ihc Iunds nvcsIcd n mrkcIblc sccurIcs
w0uld bc nccdcd by Ihc Irm n Ihc ncr IuIurc, I w0uld nvcsI n Ihc sccurIcs
whch rc rcdly mrkcIblc.
Thc Iypcs 0I sh0rIIcrm nvcsImcnI vlblc rc n0rmlly m0ncy mrkcI
nsIrumcnIs. Thcsc ncludc, Ircsury blls, c0mmcrcl ppcrs, ccrIIcIcs
0I dcp0sIs, bnk dcp0sI, cIc, dcIls 0I whch hvc bccn dscusscd n crlcr
chpIcrs.
323
Csh s Ihc m0sI lqud sscI 0I Ihc c0mpny. Thc IundmcnIl rulc s IhI
c0mpny sh0uld n0I h0ld m0rc csh Ihn s ncccssry s0 s n0I I0 l0sc s0mc
pr0IIblIy nd sh0uld n0I hvc lcss Ihn s nccdcd s0 s n0I I0 suIIcr lqudIy
pr0blcms. Thc qucsI0n Ihcn s h0w much csh sh0uld bc hcld! FrsIly,
h0wcvcr, Ihc m0Ivcs I0r h0ldng csh sh0uld bc kn0wn. Thcsc rc IrnscI0n
m0Ivc, prccuI0nry m0Ivc nd spcculIvc m0Ivc.
Thc nccd I0 chcvc Ihc rghI blncc bcIwccn I00 much csh nd I00 lIIlc
csh gvcs rsc I0 mngcmcnI's c0nccrn I0r cIIccIvc nd cIIccnI csh
mngcmcnI. Thc rcs 0I csh mngcmcnI whcrc ppr0prIc sIrIcgcs
rc rcqurcd ncludc csh plnnng, csh Il0ws mngcmcnI, 0pImum csh
lcvcl dcIcrmnI0n nd nvcsImcnI 0I csh surplus.
Thc m0sI c0mm0nly uscd sh0rI Icrm csh I0rccsIng rc Ihc rcccpIs nd
dsburscmcnIs mcIh0d nd Ihc d|usIcd ncI nc0mc mcIh0d. EIIccnI csh
mngcmcnI s chcvcd Ihr0ugh pr0pcr c0nIr0l 0I csh c0llccI0n nd
dsburscmcnI. EIIccnI csh c0llccI0n sysIcm w0uld nv0lvc Ihc usc 0I l0ck
b0xcs, l0cl dcp0sI, bnk csh IrnsIcrs mcIh0d nd s0 0n. As prI 0I Ihc
c0nIr0l 0I csh dsburscmcnI, c0mpny sh0uld usc crcdI Icrms I0 Ihc IullcsI
cxIcnI, buI cnsurc IhI Is crcdI rIng s n0I dvcrscly IIccIcd. Fnncl
mngcrs hvc Ihc rcsp0nsblIy 0I dcIcrmnng Ihc 0pImum csh blncc
I0r c0mpny. Ths, Ihcy Iry I0 d0 n ccrIn cnvr0nmcnI usng um0ls
m0dcl nd n n unccrIn cnvr0nmcnI usng Ihc Mllcr0rr m0dcl. A g00d
Inncl mngcr sh0uld n0I kccp dlc csh s Ihs Iypc 0I csh d0cs n0I
crn ny nc0mc. Hc sh0uld, IhcrcI0rc, l00k, s much s p0ssblc, I0r
mrkcIblc sh0rI Icrm nvcsImcnIs n whch hc cn nvcsI surplus Iunds.
23.8.
. Csh mngcmcnI s c0nccrncd wIh ll Ihc I0ll0wng EXCEPT
A Csh plnnng
Mngng rcccpIs nd dsburscmcnIs
C Ensurng 0nly Ixcd m0unI 0I csh s pd cch ycr s dvdcnd
0 0cIcrmnng Ihc 0pImum csh lcvcl
E !nvcsIng surplus csh whlc rrngng I0r sh0rI Icrm Icmp0rry
Inncng n dvncc
2. wh0 s IhI pcrs0n n busncss 0rgnsI0n wh0sc IuncI0n s m0sI
cl0scly rclIcd I0 csh mngcmcnI!
A Thc c0sI cc0unInI
Thc Ircsurcr
324
C Thc Inncl cc0unInI
0 Thc mngcmcnI cc0unInI
E Thc udI0r
3. Thc I0ll0wng rc Ihc c0mp0ncnIs 0I csh budgcI EXCEPT
A RcccpIs Ir0m dcbI0rs
PymcnI I0 crcdI0rs
C 0cprccI0n
0 RcpymcnI 0I l0n
E Prcv0us pcr0d csh blncc
4. Thc I0ll0wng rc mcIh0ds 0I ccclcrIng csh c0llccI0ns EXCEPT
A Spccd up prcprI0n nd dspIch 0I nv0cc
Arrngc I0r IsI pymcnI pr0ccdurc by cusI0mcr
C !ncrcsc Ihc Imc pymcnIs rcmn unc0llccIcd.
0 Ad0pI EpymcnIs sysIcm
E Arrngc I0r l0cl dcp0sI bnk
5. 0nc snglc IcI0r IhI hs lm0sI rcndcrcd Ihc p0sI0n 0I Ircsury mngcrs
wIhn Ihc 0rgnsI0n ncIIccIvc s
A !mpr0vcd mngcmcnI sklls
Ec0n0mc mclId0wn
C Fllng Iurn0vcr
0 Tcchn0l0gy
E !mpr0vcmcnI n p0sIl dclvcry
23.8.2
. SIIc 0nc m0Ivc I0r h0ldng csh.
2. McnI0n 0nc mcIh0d 0I sh0rIIcrm csh I0rccsIng
3. SIIc 0nc dvnIgc 0I EpymcnI sysIcm n rclI0n I0 csh mngcmcnI.
4. whI s Ihc 0pImum csh blncc I0 h0ld!
5. SIIc 0nc nsIrumcnI 0I Ihc Inncl mrkcI IhI my bc vlblc I0r nvcsImcnI
0I sh0rIIcrm Iunds whch s n cxccss 0I rcqurcmcnIs.
325
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ UndcrsInd h0w c0mpny dcIcrmncs Is crcdI nd c0llccI0n p0lccs,
+ UndcrsInd Ihc pr0ccdurc I0r cvluIng Ihc crcdI rsk 0I prIculr dcbI0r,
+ 0scuss IcI0rng pr0ccdurc nd kn0w Ihc Iypcs 0I IcI0rng IhI cn bc
undcrIkcn,
+ Expln Ihc c0sIs nd bcncIIs 0I IcI0rng,
+ 0scuss Ihc 0vcrvcw 0I Irdc crcdI, nd rcs0ns I0r grnIng crcdI,
+ Expln crcdI Icrms wIh rcspccI I0 dsc0unIs, nd
+ 0vc Ihc dvnIgcs nd dsdvnIgcs 0I grnIng dsc0unI.
CusI0mcrs I0 wh0m Ihc Irm's pr0ducIs 0r scrvccs rc s0ld 0n crcdI rc cllcd
Irdc dcbI0rs 0r smply dcbI0rs. !I nv0lvcs n clcmcnI 0I rsk nd mplcs
IuIurIy.
!n m0sI Irms, dcbI0rs c0nsIIuIc subsInIl pr0p0rI0n 0I currcnI sscIs
IIcr nvcnI0rcs. Sncc subsInIl m0unIs rc Icdup n Irdc dcbI0rs, I
nccds crcIul nlyss nd pr0pcr mngcmcnI.
A Irm's nvcsImcnI n cc0unIs rcccvblc 0r dcbI0rs dcpcnds 0n Ihc v0lumc
0I crcdI slcs nd c0llccI0n pcr0d. Thc Inncl mngcr cn nIlucncc
Ihc v0lumc 0I crcdI slcs nd c0llccI0n pcr0d Ihr0ugh crcdI p0lcy whch
ncludcs:
() CrcdI SIndrds nd Anlyss,
(b) CrcdI Icrms, nd
(c) C0llccI0n cII0rI.
32b
A Irm my I0ll0w lcncnI 0r sIrngcnI crcdI p0lcy dcpcndng 0n Ihc nIurc
nd Iypc 0I cusI0mcrs. F0r cxmplc, c0mpny I0ll0wng lcncnI crcdI
p0lcy, my grnI crcdI I0r l0ngcr pcr0ds I0 cusI0mcrs wh0sc crcdI
w0rIhncss s n0I Iully kn0wn 0r wh0sc Inncl p0sI0n s d0ubIIul. !n
c0nIrsI, Irm I0ll0wng sIrngcnI crcdI p0lcy my grnI crcdIs 0n
hghly sclccIvc bss 0nly I0 Ih0sc cusI0mcrs wh0 hvc pr0vcn crcdI
w0rIhncss nd wh0 rc Innclly sIr0ng. H0wcvcr, Ihc bcsI p0lcy wll bc
I0 d0pI crcdI p0lccs rngng bcIwccn sIrngcnI I0 lcncnI.
Thc g0l 0I Ihc Irm's crcdI p0lcy s I0 mxmsc Ihc vluc 0I Ihc Irm by
csIblshng n 0pImum crcdI p0lcy. T0 chcvc Ihs g0l, Ihc Irm wll
hvc I0 cvluIc Is crcdI p0lcy n Icrms 0I b0Ih rcIurn nd c0sIs 0I ddI0nl
slcs. !n sh0rI, Ihc Irms crcdI p0lcy wll bc dcIcrmncd by Ihc Irdc 0II
bcIwccn 0pp0rIunIy c0sI nd crcdI dmnsIrI0n c0sIs nd bd dcbIs
l0sscs.
!n csIblshng n 0pImum crcdI p0lcy, Ihc Inncl mngcr musI c0nsdcr
s0mc dccs0n vrblcs whch nIlucncc Ihc lcvcl 0I rcccvblcs. Thcsc
vrblcs ncludc:
() CrcdI sIndrds nd nlyss,
(b) CrcdI Icrms, nd
(c) C0llccI0n p0lcy nd pr0ccdurcs.
24.2.
Thcsc rc Ihc crIcr whch Irm I0ll0ws n sclccIng cusI0mcrs I0r
Ihc purp0sc 0I crcdI cxIcns0n. Thc Irm my hvc IghI sIndrds,
IhI s, I my scll m0sIly 0n csh bss nd my 0nly cxIcnd crcdI I0
Ihc m0sI rclblc nd Innclly sIr0ng cusI0mcrs.
!n such cscs, Ihc Irm my n0I hvc bddcbI l0sscs buI my n0I bc
blc I0 cxpnd slcs. Thc pr0II s0 scrIccd 0n l0sI slcs my bc
m0rc Ihn Ihc c0sIs svcd. 0n Ihc 0Ihcr hnd, I Ihc crcdI sIndrds
rc l00sc, Ihc Irm my hvc lrgcr slcs buI I Ihc cxpcnsc 0I bd
dcbI l0sscs nd hugc blncc 0I dcbI0rs.
!n cIIccI, Ihc ch0cc 0I 0pImum crcdI sIndrds nv0lvcs Irdc 0II
bcIwccn ncrcmcnIl rcIurn nd ncrcmcnIl c0sIs.
327
CrcdI sIndrds nIlucncc Ihc qulIy 0I Ihc Irm's cusI0mcrs. Thcrc
rc Iw0 spccIs 0I Ihc qulIy 0I cusI0mcrs, nmcly:
() Thc vcrgc c0llccI0n pcr0d whch dcIcrmncs Ihc spccd 0I
pymcnI by cusI0mcrs.
(b) Thc dcIulI rIc whch cn bc mcsurcd n Icrms 0I bddcbI
l0sscs rI0 (dcIulI rsk). 0cIulI rsk s Ihc lkclh00d IhI
cusI0mcr wll Il I0 rcpy Ihc crcdI 0blgI0n.
!n 0rdcr I0 csImIc Ihc pr0bblIy 0I dcIulI, Ihc I0ll0wng
Ihrcc C's sh0uld bc gvcn c0nsdcrI0n: chrcIcr, cpcIy, nd
c0ndI0n.
() ChrcIcr rcIcrs I0 Ihc wllngncss 0I Ihc cusI0mcr I0 py,
IhI s, m0rl IcI0r.
() CpcIy, rcIcrs I0 cusI0mcrs blIy I0 py, IhI s rcl
w0rIh 0I sccurIy 0IIcrcd by Ihc cusI0mcr nd Is Inncl
p0sI0n.
() C0ndI0n rcIcrs I0 Ihc prcvlng cc0n0mc nd 0Ihcr
c0ndI0n whch my IIccI Ihc cusI0mcr's blIy I0 py.
!nI0rmI0n 0n Ihc b0vc vrblcs my bc c0llccIcd. H0wcvcr,
c0llccIng crcdI nI0rmI0n nv0lvcs c0sI nd Imc. 0cpcndng 0n
Ihcsc Iw0 IcI0rs, IhI s, Imc nd c0sI, ny 0r c0mbnI0n 0I Ihc
I0ll0wng s0urccs my bc cmpl0ycd:
() Ths s 0nc 0I Ihc cscsI wy I0 0bIn
nI0rmI0n rcgrdng Ihc Inncl c0ndI0n nd pcrI0rmncc
0I Ihc pr0spccIvc cusI0mcr. Thc publshcd Inncl sIIcmcnI
0I publc lmIcd c0mpncs rc csly vlblc.
(b) Ths s n0Ihcr s0urcc I0r c0llccIng crcdI
nI0rmI0n. A cusI0mcr cn bc rcqucsIcd I0 nsIrucI hs bnkcr
I0 pr0vdc nI0rmI0n rcqurcd by Ihc Irm.
(c) A Irm cn sk Ihc pr0spccIvc cusI0mcr I0
gvc Irdc rcIcrcnccs. !I my nssI I0 gvc Ihc nmcs 0I such
pcrs0ns 0r Irms wIh wh0m Ihc cusI0mcr hs currcnI dclngs.
T0 gurd gnsI cusI0mcr Iurnshng mslcdng rcIcrcnccs,
Ihc Irm cn nssI 0n Iurnshng Ihc rcIcrcncc 0I pc0plc 0r Irms
0I rcpuIc.
328
(d) Ths ncludc Ihc cusI0mcr, crcdI burcu cIc.
Thc nI0rmI0n s0 c0llccIcd sh0uld bc uscd l0ng wIh Ihc
Irm's crcdI nvcsIgI0n nd nlyss, IhI s, nlyss 0I
crcdI Ilc, nlyss 0I Inncl rI0s nd nlyss 0I Ihc nIurc
0I Ihc cusI0mcr's busncss nd Is mngcmcnI, I0 cIcg0rzc
cusI0mcrs cc0rdng I0 Ihcr crcdI w0rIhncss nd dcIulI rsk
s I0ll0ws:
() 000d cc0unIs,
() 00ubIIul dcbIs, nd
() d dcbIs.
Thc b0vc cIcg0rsI0n wll sssI Ihc Irm n dccdng b0uI
Ihc cxIcns0n 0I crcdI I0 g00d cc0unIs nd rc|ccIng Ihc crcdI
rcqucsI 0I bd cc0unIs whlc dcv0Ing m0rc Imc I0 d0ubIIul
(mrgnl) cc0unIs.
T0 sssI n Ihc b0vc cIcg0rsI0n 0I dcbI0rs, Ihc I0ll0wng
numcrcl crcdI sc0rng m0dcls my bc uscd. Thcsc ncludc:
() Adh0c ppr0ch (AA): Ths rcIcrs I0 Ihc dcvcl0pmcnI 0I
numcrcl crcdI sc0rng I0 dcIcrmnc cusI0mcrs' crcdI
w0rIhncss.
() Smplc dscrmnnI nlyss, (S0A): Ths rcIcrs I0 usng
cmprcl nlyss such s rI0 nlyss, nmcly:
+ Ernngs bcI0rc dcprccI0n, nIcrcsI nd Ixcs
(E0!T) I0 slcs.
+ 0pcrIng csh Il0ws I0 slcs.
(c). Ths s Ihc
Icchnquc IhI c0mbncs mny IcI0rs cc0rdng I0 Ihc
mp0rIncc (wcghI) I0 bc gvcn I0 cch IcI0r nd dcIcrmnc
c0mp0sIc sc0rc I0 dIIcrcnIIc g00d cusI0mcrs Ir0m bd
0ncs.
CrcdI sc0rng m0dcls, such s mulIplc dscrmnnI nlyss (M0A)
rc bscd 0n 0b|ccIvc IcI0rs nd hclp Irm I0 quckly dsIngush
bcIwccn g00d nd bd cusI0mcrs hcncc Ihcy cn bc c0nsIIcnIly nd
0b|ccIvcly pplcd by ny crcdI pprscr.
CrcdI sc0rng m0dcls cn bc mslcdng sncc Ihcy rc bscd 0n psI
dI. As such, Ihc Irm my rcIusc crcdI I0 numbcr 0I mrgnlly
g00d cusI0mcrs. Smlrly, cusI0mcr wh0 hs bccn rcgulr n pyng
n Ihc psI my Il I0 d0 s0 n Ihc IuIurc. ThcrcI0rc, Irm nccds I0
329
g0 bcy0nd crcdI dccs0n, I my hvc I0 rcly 0n g00d |udgmcnI ls0.
Frms sh0uld hvc l0ng Icrm pcrspccIvc nd sh0uld Ihnk n Icrms
0I sccurng dcpcndblc cusI0mcrs wh0 wll sIy wIh I.
CrcdI Icrms rc Ihc c0ndI0ns undcr whch Ihc Irm sclls I0 cusI0mcrs
0n crcdI. Thcsc c0ndI0ns rc Ihc crcdI pcr0d/crcdI lmI nd Ihc
csh dsc0unI.
CrcdI lmI s Ihc mxmum m0unI 0I crcdI whch Irm wll
cxIcnd I0 cusI0mcr I p0nI n Imc. 0ncc dccs0n hs
bccn Ikcn I0 cxIcnd crcdI I0 n pplcnI (cusI0mcrs), Ihc
m0unI nd durI0n 0I Ihc crcdI wll hvc I0 bc dccdcd. Thc
mgnIudc 0I Ihc crcdI wll dcpcnd up0n Ihc m0unI 0I
c0nIcmplIcd slc nd Ihc cusI0mcr's Inncl sIrcngIh. whcrc
Ihc cusI0mcr s IrcqucnI buycr, crcdI lmI wll bc
csIblshcd bscd 0n hs n0rml buyng pIIcrn whlc n Ihc
csc 0I cusI0mcr wh0 s n0I Irly rcgulr n scIIlng hs dcbI,
Ihc crcdI lmI my bc Ixcd wIh rcIcrcncc I0 Ihc 0uIsIndng
m0unI. Thc crcdI lmI rc usully rcvcwcd pcr0dclly nd
my bc rcvscd d0wnwrd I sl0w pymcnI s 0bscrvcd. A
cusI0mcr my I Imcs, sk I0r crcdI n cxccss 0I hs crcdI
lmI. AI such Imc, Ihc Irm my cccpI 0r rc|ccI dcpcndng 0n
Ihc crcumsInccs 0I Ihc Irm nd Is nlyss 0I Ihc rskrcIurn
Irdc0II 0I Ihc rcqucsI.
!n ddI0n I0 cxIcndng crcdI lmI I0 cusI0mcr, Ihc Irm ls0
hs I0 dcIcrmnc Ihc durI0n 0I Ihc crcdI, kccpng n vcw Ihc
ndusIry n0rm.
Ths s Ihc lcngIh 0I Imc I0r whch crcdI s cxIcndcd I0
cusI0mcrs. !I s gcncrlly sIIcd n Icrms 0I ncI dIc. F0r
cxmplc, I Ihc Irms crcdI Icrms rc 'ncI b0', I s cxpccIcd
IhI cusI0mcrs wll py n0I lIcr Ihn b0 dys.
A Irm's crcdI pcr0d my bc g0vcrncd by Ihc ndusIry n0rms
buI Ihc Irm cn lcngIhcn 0r IghIcn Is crcdI pcr0d dcpcndng
0n Is 0b|ccIvc.
Thc Irm my IghIcn Is crcdI pcr0d I cusI0mcrs rc dcIulIng
I00 IrcqucnIly nd bddcbI l0sscs rc buldng up. 0n Ihc 0Ihcr
hnd, Ihc c0mpny my lcngIhcn Is crcdI pcr0d n 0rdcr I0
330
ncrcsc Is 0pcrIng pr0II Ihr0ugh cxpndcd slcs, 0n Ihc
cxpccII0n IhI Ihc c0sI 0I cxIcndcd pr0II wll bc lcss Ihn
Ihc ncrcmcnIl 0pcrIng pr0II.
Pndcy (2003) dcIncs csh dsc0unI s rcducI0n n pymcnI
0IIcrcd I0 cusI0mcrs I0 nducc Ihcm I0 rcpy crcdI 0blgI0ns
wIhn spccIcd pcr0d 0I Imc whch wll bc lcss Ihn Ihc
n0rml crcdI pcr0d.
!I s usully cxprcsscd s pcrccnIgc 0I slcs. Thc Icrms
usully ndcIc Ihc rIc 0I dsc0unI nd Ihc pcr0d I0r whch I
s vlblc. !I Ihc cusI0mcr Ils I0 py wIhn Ihc pcr0d
0IIcrcd, hc musI mkc pymcnI wIhn Ihc ll0wcd crcdI
pcr0d. F0r cxmplc, crcdI Icrms my bc cxprcsscd s '2/5
ncI 40'.
Ths mcns IhI 2 pcrccnI dsc0unI wll bc grnIcd I Ihc
cusI0mcr pys wIhn 5 dys, I hc Ils I0 py wIhn Ihc 5
dys, hc musI mkc pymcnI wIhn 40 dys.
A Irm uscs csh dsc0unI s I00l I0 ncrcsc slcs nd
ccclcrIc c0llccI0ns Ir0m cusI0mcrs. !n Ihs rcspccI Ihc lcvcl
0I rcccvblc nd ss0cIcd c0sIs my bc rcduccd. Thc c0sI
nv0lvcd s Ihc dsc0unI Ikcn by cusI0mcrs.
A Irm sh0uld dcvcl0p c0llccI0n p0lcy whch wll cnsurc pr0mpI
nd rcgulr pymcnI. Ths s nccdcd I0r IsI Iurn0vcr 0I w0rkng
cpIl, kccpng c0llccI0n c0sIs nd bd dcbIs wIhn lmIs nd
mnInng c0llccI0n cIIccncy. RcgulrIy n c0llccI0n 0I dcbIs
kccps dcbI0rs lcrI nd Ihcy Icnd I0 py Ihcr ducs pr0mpIly.
A clcrcuI c0llccI0n pcr0d pr0ccdurc sh0uld bc csIblshcd nd Ihc
c0llccI0n pr0ccdurcs I0r dclnqucnI cc0unIs csIblshcd n
unmbgu0us Icrms. T0 v0d Ihc l0ss 0I sl0w pyng cusI0mcrs I0
c0mpcII0rs, Ihcy sh0uld bc hndlcd IcIIully s Ihc c0llccI0n pr0ccss
nIIcd quckly wIh0uI gvng ny chncc I0 Ihcm my nIg0nsc
Ihcm.
Thc rcsp0nsblIy I0r c0llccI0n nd I0ll0w up sh0uld bc cxplcIly
Ixcd. !I my bc cnIrusIcd I0 Ihc cc0unIs 0r slcs dcprImcnI 0r I0
scprIc dcprImcnI. Thc slcs nd cc0unIs dcprImcnI sh0uld c0
0rdnIc Ihcr cIvIcs nd w0rk I0gcIhcr I0 cnsurc sm00Ih c0llccI0n
0I dcbIs. Thc c00rdnI0n bcIwccn Ihc Iw0 dcprImcnIs sh0uld bc
33
I0rmlzcd nd Irmly csIblshcd. S0mc cusI0mcrs my bc wllng
I0 mkc pymcnI buI my bc n IghI Inncl p0sI0n Ihcrcby unblc
I0 py 0n duc dIc. Ths my bc duc I0 rcccss0nry c0ndI0n 0r 0Ihcr
IcI0rs bcy0nd Ihc c0nIr0l 0I Ihc cusI0mcrs, such cscs nccd spccl
c0nsdcrI0ns. Thc c0llccI0n pr0ccdurc gnsI Ihcm sh0uld bc
nIIcd 0nly IIcr Ihcy hvc 0vcrc0mc Ihcr Inncl dIIculIcs nd
rc unwllng I0 py.
Thc Irm sh0uld ls0 dccdc b0uI 0IIcrng csh dsc0unI I0r pr0mpI
pymcnI nd ls0 cnsurc pr0pcr m0nI0rng I0 v0d sIuI0n whcrc
s0mc cusI0mcrs my Iry I0 sh0rIchngc Ihc Irm. ThcrcI0rc, Ihc Irm
sh0uld I0ll0w wcll ld d0wn c0llccI0n p0lcy nd pr0ccdurc I0 c0llccI
ducs Ir0m Is cusI0mcrs. whcn Ihc n0rml crcdI pcr0d grnIcd I0
cusI0mcr cxprcs, nd pymcnI hs n0I bccn mdc Ihc Irm sh0uld
scnd p0lIc lcIIcr I0 Ihc cusI0mcr rcmndng hm IhI Ihc cc0unI s
0vcrduc. !I Ihcrc s n0 rcsp0nsc, Ihc Irm my scnd pr0grcssvcly,
sIr0ngly w0rdcd lcIIcrs I0ll0wcd by Iclcph0nc clls, cmls nd
pcrs0nl vsI. !I Ihc pymcnI s sIll n0I mdc, Ihc Irm my nIIc
lcgl cI0n 0r plcc Ihc dcbI n Ihc hnds 0I dcbI c0llccI0r IIcr
cxmnng Ihc cusI0mcrs Inncl c0ndI0n. !I Ihc Inncl c0ndI0n
s wck, lcgl cI0n my bc dclycd I0 v0d hsIcnng Ihc cusI0mcrs
ns0lvcncy whch my bc dcIrmcnIl I0 Ihc Irm. !I sh0uld bc n0Icd
IhI, I s bcIIcr I0 bc pIcnI nd wI 0r cccpI, rcduccd pymcnI n
Ihc scIIlcmcnI 0I Ihc cc0unI nsIcd 0I l0sng Ihc wh0lc dcbI.
!n ddI0n I0 Ihc b0vc sIcps, Irm nccds I0 c0nInu0usly m0nI0r
nd c0nIr0l Is rcccvblcs I0 cnsurc Ihc succcss 0I Is c0llccI0n cII0rIs.
S0mc mcIh0ds IhI c0uld bc d0pIcd rc vcrgc c0llccI0n pcr0d
mcIh0d, Ihc gng schcdulc mcIh0d nd Ihc c0llccI0n cxpcrcncc
mIrx.
!I mcsurcs Ihc qulIy 0I dcbI0rs n n ggrcgIvc wy nd
s clculIcd s I0ll0ws:
. dys

3b5
x
Slcs CrcdI
0cbI0rs
Thc vcrgc c0llccI0n pcr0d s0 clculIcd s c0mprcd wIh
Ihc Irms sIIcd crcdI pcr0d I0 |udgc Ihc cIIccncy 0I rcc0vcrcs
Ths mcIh0d brcks d0wn rcccvblcs
cc0rdng I0 Ihc lcngIh 0I Imc whch Ihcy hvc bccn
0uIsIndng s I0ll0ws:
332
0uIsIndng 0uIsIndng Am0unI PcrccnIgc 0I T0Il
Pcr0d dys 0I Rcccvblcs N'000 Rcccvblcs
0 30 ,000 25.00
3 40 2,000 50.00
4 50 500 2.50
5 b0 400 0.00
0vcr b0 00 2.50
Thc b0vc Iw0 mcIh0ds hvc ccrIn lmII0ns whch mkc Ihc Ihrd
mcIh0d, IhI s, Ihc c0llccI0n cxpcrcncc mIrx, I0 bc supcr0r. Thcsc
lmII0ns rc:
() Thcy rc bscd 0n ggrcgIc dI.
() Thcy Il I0 rclIc 0uIsIndng rcccvblcs 0I pcr0d wIh Ihc
crcdI slcs 0I Ihc smc pcr0d.
(c) Thc slcs 0vcr pcr0d 0I Imc rc
sh0wn h0rz0nIlly nd ss0cIcd rcccvblcs vcrIclly n Ibulr
I0rm.
An cxmplc 0I c0llccI0n cxpcrcncc mIrx s s I0ll0ws:
Slcs N'000 500 350 450 280 30 420
1nury 400
Fcbrury 250 270
Mrch 50 70 3b0
Aprl 0 70 20 230
My 0 0 30 40 250
1unc 0 0 0 40 50 320
Slcs N'000 500 350 450 280 30 420
1nury 80.0
Fcbrury 50.0 77.
Mrch 0.0 48.b 80.0
Aprl 0 20.0 4b.7 82.
My 0 0 b.7 50.0 80.b
1unc 0 0 0 4.3 48.4 7b.2
333
Tblc 24.2 c0nIns nI0rmI0n 0n Ihc pcrccnIgc crcdI slcs c0llccIcd
0uI 0I Ihc I0Il crcdI slcs I0r Ihc m0nIhs n whch Ihcy rc sh0wn.
F0r cxmplc, 0uI 0I Ihc I0Il crcdI slcs n 1nury, 80 pcr ccnI
(
400
/
500
), 50 pcr ccnI (
250
/
500
) nd 0 pcr ccnI (
50
/
00
) wcrc 0uIsIndng
durng Ihc m0nIhs 0I 1nury, Fcbrury nd Mrch rcspccIvcly. !n
0Ihcr w0rds 20 pcr ccnI 0I Ihc dcbIs wcrc pd, I Ihc cnd 0I 1nury,
50 pcr ccnI I Ihc cnd 0I Fcbrury, 90 pcr ccnI I Ihc cnd 0I Mrch nd
Ihc blncc c0llccIcd durng Ihc m0nIh 0I Aprl rcsulIng n nl
blncc I Ihc cnd 0I Aprl. CrcdI 0I 0Ihcr m0nIhs cn ls0 bc nlyscd
n Ihc smc wy. Thus, Ihc Iblc gvcs n dc 0I Ihc mnncr n whch
Ihc Irm c0llccIs gvcn m0nIh's slc.
CrcdI mngcmcnI s spcclscd cIvIy whch nv0lvcs l0I 0I Imc nd
cII0rI. !I s vcry pr0blcmIc nd IhcrcI0rc rcqurcs s0mc pr0Icss0nl sklls.
ccusc 0I Ihc pr0blcmIc nIurc 0I dcbI c0llccI0n nd Ihc Imc IcI0r, s0mc
Irms d0 ssgn Ihcr crcdI mngcmcnI nd c0llccI0n I0 spcclsI
0rgnsI0ns, cllcd IcI0rng 0rgnsI0ns. FcI0rng s p0pulr
mcchnsm I0r mngng, Inncng nd c0llccIng dcbIs. !I s mcIh0d 0I
c0nvcrIng n0npr0ducIvc, ncIvc sscI (rcccvblcs) nI0 pr0ducIvc
sscI (csh) by scllng rcccvblcs I0 c0mpny IhI spcclscs n dcbI
c0llccI0n nd dmnsIrI0n. !I s n0I ycI c0mm0n n Ihc Ngcrn busncss
cnvr0nmcnI buI I s grdully bcng nIr0duccd I0 Ihc bnks by s0mc
c0mpncs nd ndvduls. H0wcvcr, Ihc usc 0I dcbI c0llccI0rs s m0rc
pr0n0unccd.
sc0c (975) dcIncs IcI0rng s busncss nv0lvng c0nInung lcgl
rclI0nshp bcIwccn Inncl nsIIuI0n (Ihc IcI0r) nd busncss
c0nccrn (Ihc clcnI) scllng g00ds 0r pr0vdng scrvccs I0 Irdc cusI0mcrs
(Ihc cusI0mcrs) whcrcby Ihc IcI0r purchscs Ihc clcnI's cc0unIs rcccvblc
nd n rclI0n IhcrcI0, c0nIr0ls Ihc crcdI cxIcndcd I0 cusI0mcrs nd
dmnsIcrs Ihc slcs lcdgcr. 0n Ihc 0Ihcr hnd I Ihc Undr0I c0nvcnI0n 0n
nIcrnI0nl IcI0rng hcld n 988, IcI0rng ws dcIncd s c0nIrcI
bcIwccn Ihc supplcrs 0I g00ds/scrvccs nd Ihc IcI0r undcr whch Ihc
supplcr nd Is cusI0mcrs (dcbI0rs) 0Ihcr Ihn Ih0sc I0r Ihc slc 0I g00ds
b0ughI prmrly I0r Ihcr pcrs0nl, Imly 0r h0usch0ld usc: Ihc IcI0r s I0
pcrI0rm I lcsI Iw0 0I Ihc I0ll0wng IuncI0ns:
() Fnncc I0r Ihc supplcr, ncludng l0ns nd dvncc pymcnIs,
(b) MnIcnncc 0I cc0unIs (lcdgcrng rclIng I0 Ihc rcccvblcs),
(c) C0llccI0n 0I cc0unIs (lcdgcrng rclIng I0 Ihc rcccvblcs), nd
(d) Pr0IccI0n gnsI dcIulI n pymcnI by dcbI0rs.
334
N0Icc 0I ssgnmcnI 0I Ihc rcccvblcs s I0 bc gvcn I0 dcbI0rs. Thc b0vc
dcInI0ns clcrly ndcIc Ihc IuncI0ns 0I IcI0r whch cn bc summrscd
s I0ll0ws,
MnIcnncc 0I slcs lcdgcr nd crcdI dmnsIrI0n, I0r cxmplc:
() Hclps nd dvscs Ihc clcnI Ir0m Ihc sIgc 0I dccdng crcdI cxIcns0n
I0 cusI0mcrs I0 Ihc Inl sIgc 0I b00k dcbI c0llccI0n,
(b) MnIns n cc0unI I0r ll cusI0mcrs 0I ll Icms 0wng, I0 cnsurc
c0llccI0n 0n duc dIc,
(c) Hclps clcnI I0 dccdc whcIhcr 0r n0I nd h0w much I0 cxIcnd I0
cusI0mcrs,
(d) Pr0vdcs nI0rmI0n I0 clcnIs b0uI mrkcI Ircnds, c0mpcII0n nd
cusI0mcrs crcdI w0rIhncss,
(c) Mkcs sysIcmIc nlyss 0I crcdI nI0rmI0n I0r Is pr0pcr
m0nI0rng,
(I) Prcprcs crcdI nd c0llccI0n rcp0rIs I0r Ihc usc 0I Ihc clcnI,
(g) C0llccI0n 0I dcbIs nd pr0IccI0n gnsI bd dcbIs (pr0IccI0n gnsI
dcIulI .c. undcrIkcs ll ncccssry c0llccI0n cIvIy),
(h) Fnncl sssIncc .c. cxIcndng csh dvncc gnsI b00k dcbIs.
Thc mxmum dvncc IcI0r pr0vdcs s cqul I0 Ihc m0unI 0I
IcI0rcd dcbI lcss:
() Ihc IcI0rng c0mmss0n,
() nIcrcsI n dvncc, nd
() rcscrvc rcqurcd I0 c0vcr bddcbIs l0sscs.
() Pr0vdng 0Ihcr scrvccs lkc nI0rmI0n 0n pr0spccIvc buycrs,
Inncl c0unsclng, mngcmcnI 0I lqudIy, Inncng cqusI0n
0I nvcnI0rcs, pr0vdng IclIcs I0r 0pcrIng lcIIcrs 0I crcdI, nd
s0 0n.
Usully Ihc Irm scnds Ihc cusI0mcrs 0rdcr I0 Ihc IcI0r I0r cvluIng
Ihc cusI0mcrs crcdI w0rIhncss nd grccs I0 buy rcccvblcs bcI0rc
Ihc Irm dspIchcs g00ds I0 Ihc cusI0mcr. Thc cusI0mcr wll IhcrcIIcr
bc nI0rmcd IhI hs cc0unI hs bccn s0ld I0 Ihc IcI0r I0 wh0m hc
wll bc nsIrucIcd I0 drccIly mkc pymcnI. T0 pcrI0rm hs crcdI
cvluI0n nd c0llccI0n 0I rcccvblcs I0r lrgc mcmbcr 0I clcnIs,
335
IcI0r my mnIn crcdI dcprImcnI wIh spcclscd sIII. 0ncc
Ihc IcI0r hs purchscd Irm's rcccvblcs nd hc grccs I0 0wn
Ihcm, hc wll hvc I0 pr0vdc pr0IccI0n gnsI ny bd dcbI l0sscs
I0 Ihc Irm.
Thc I0ll0wngs rc Ihc I0ur p0pulr Iypcs 0I IcI0rng IclIcs:
+ Full scrvcc n0nrcc0ursc (0ld lnc) IcI0rng,
+ Full scrvcc rcc0ursc IcI0rng,
+ ulk/gcncy IcI0rng, nd
+ N0nn0IIcI0n IcI0rng.
()
!n Ihs mcIh0d, b00k dcbIs rc purchscd by Ihc IcI0r,
ssumng 00 pcrccnI crcdI rsk. Thc I0Il m0unI 0I nv0cc
hvc I0 bc pd I0 clcnIs n Ihc cvcnI 0I dcbI bcc0mng bd.
scd 0n Ihc grccmcnI bcIwccn Ihc clcnI nd Ihc IcI0r, Ihc
IcI0r my dvncc csh up I0 7080 pcrccnI 0I Ihc b00k dcbIs
mmcdIcly I0 Ihc clcnI. !n vcw 0I Ihc dvncc, pymcnIs
wll bc d0mclcd I0 Ihc IcI0r wh0 wll Ihcn mnIn Ihc
cusI0mcr' s cc0unI nd prcprcs gcwsc rcp0rIs 0I
0uIsIndng b00k dcbIs I0r 0nwrd dspIch I0 Ihc clcnI,
pcr0dclly. Ths mcIh0d s sd I0 bc vcry p0pulr n Ihc USA
whcrc I s ls0 kn0wn s "0ld lnc" IcI0rng.
(b)
Undcr Ihs mcIh0d, Ihc IcI0r d0cs n0I Ikc Iull rcsp0nsblIy
I0r Ihc dcbIs. Thc clcnI s, IhcrcI0rc, n0I pr0IccIcd gnsI Ihc
rsk 0I bd dcbIs. Any dvncc mdc I0 Ihc clcnI gnsI b00k
dcbIs wll hvc I0 bc rcIundcd I0 Ihc IcI0r 0I Ihc cusI0mcrs.
M0sI c0mpncs prcIcc rcc0ursc IcI0rng sncc I s n0I csy
I0 0bIn crcdI nI0rmI0n nd Ihc c0sI 0I bd dcbI pr0IccI0n
s vcry hgh. Ths Iypc 0I IcI0rng s 0IIcn uscd s mcIh0d 0I
sh0rIIcrm Inncng rIhcr Ihn purc crcdI mngcmcnI nd
pr0IccI0n scrvcc. !I s lcss rsky Ir0m Ihc IcI0r's vcw p0nI
nd Ihus lcss cxpcnsvc I0 Ihc clcnI Ihn n0nrcc0ursc IcI0rng.
!I s ls0 prcIcrrcd whcn lrgc sprcd 0I cusI0mcrs wIh
rclIvcly smll m0unI pcr cusI0mcr s nv0lvcd.
33b
(c)
Undcr Ihs mcIh0d, Ihc IcI0r Innccs Ihc b00k dcbIs cIhcr 0n
rcc0ursc 0r wIh0uI rcc0ursc. !I s bsclly uscd s mcIh0d
0I Inncng b00k dcbIs. Thc clcnI mnIns Ihc slcs lcdgcr
nd dmnsIcr Ihc crcdI.
(d)
!n Ihs Iypc 0I IcI0rng, cusI0mcrs rc n0I nI0rmcd b0uI Ihc
IcI0rng grccmcnI. Thc IcI0r mnIns Ihc slcs cc0unI
lcdgcr n Ihc nmc 0I slcs c0mpny I0 whch Ihc clcnI sclls
hs b00k dcbIs. Thc IcI0r dcls wIh Ihc clcnI's cusI0mcr
Ihr0ugh slcs c0mpny nd pcrI0rms ll hs usul IuncI0ns
wIh0uI dscl0surc I0 Ihc clcnIs cusI0mcrs. !n cIIccI, Ihcrc s
I0urIh prIy, whch s Ihc slcs c0mpny.
Thcrc rc Iw0 Iypcs 0I c0sIs nv0lvcd n IcI0rng. Thcsc rc:
() Thc IcI0rng c0mmss0n 0r scrvcc Icc, nd
(b) Thc nIcrcsI 0n dvncc grnIcd by Ihc IcI0r I0 Ihc Irm.
Ths s Ihc rcmuncrI0n
pd I0 Ihc IcI0r I0r Ihc pr0Icss0nl scrvccs rcndcrcd, such s,
cvluI0n 0I crcdIs, c0llccI0n 0I dcbIs nd 0Ihcr scrvccs. !I s usully
cxprcsscd s pcrccnIgc 0I Ihc ncI Icc vluc 0I dcbIs IcI0rcd.
Ths s usully b0vc Ihc bnk's rIc.
() FcI0rng pr0vdcs spcclscd scrvcc n crcdI mngcmcnI
nd Ihus, hclps Ihc Irm's mngcmcnI I0 c0nccnIrIc 0n
Icchn0l0gy, pr0ducI0n, mrkcIng, pcrs0nncl nd 0Ihcr
mngcmcnI IuncI0ns.
(b) FcI0rng hclps Ihc Irms I0 svc c0sI 0I crcdI dmnsIrI0n
such s, c0sI 0I crcdI nvcsIgI0n, cvluI0n nd c0llccI0n
0I dcbIs nd bd dcbI l0sscs.
whlc IcI0rng my bc bcncIcl I0 Ihc clcnI I s ncccssry I0r
Irm I0 cvluIc Ihc c0sIs nd bcncIIs ss0cIcd wIh I bcI0rc rrvng
I dccs0n rcgrdng Ihc cmpl0ymcnI 0I IcI0r.
337
As mcnI0ncd n n crlcr chpIcr 0n w0rkng cpIl mngcmcnI, Ihcrc
rc Ihrcc wys 0I Inncng w0rkng cpIl. Thcsc rc: l0ngIcrm Inncng
sh0rIIcrm Inncng nd sp0nInc0us Inncng. AprI Ir0m l0ngIcrm
Inncng whch s rcc0mmcndcd I0r usc I0 Inncc pcrmncnI currcnI sscIs,
sh0rIIcrm Inncng nd sp0nInc0us Inncc Irdc crcdI nd 0uIsIndng
cxpcnscs rc Ihc m|0r s0urccs 0I Inncng w0rkng cpIl. !n Ihs sccI0n,
Ihc I0cus wll bc 0n Irdc crcdI s mcIh0d 0I Inncng w0rkng cpIl.
Trdc crcdI n Ihs c0nIcxI rcIcrs I0 Ihc crcdI IhI cusI0mcr gcIs Ir0m
supplcrs 0I g00ds n Ihc n0rml c0ursc 0I busncss. !I s sIuI0n n whch
Irm mkcs purchscs I0r whch pymcnI s n0I mdc mmcdIcly I0 Ihc
supplcr. Ths s0urcc 0I Inncc s m0sIly uscd by smll Irms, such s mrkcI
w0mcn, wh0 Inds I dIIculI I0 rsc Iunds Ir0m bnks 0r 0Ihcr s0urccs n Ihc
cpIl mrkcIs. Trdc crcdI s m0sIly n nI0rml rrngcmcnI nd s
grnIcd 0n n 0pcn cc0unI bss. Thc 0pcn cc0unI Irdc crcdI ppcrs s
sundry crcdI0rs 0r cc0unIs pyblc 0n Ihc buycr's blncc shccI s currcnI
lblIy.
A supplcr scnds g00ds I0 Ihc buycr 0n crcdI whch Ihc buycr cccpIs Ihcrcby
grccng I0 py Ihc m0unI duc s pcr slcs Icrms n Ihc nv0cc. H0wcvcr,
hc d0cs n0I I0rmlly ckn0wlcdgc I s dcbI s hc d0cs n0I sgn ny lcgl
nsIrumcnI. 0ncc Ihc Irdc lnks hvc bccn csIblshcd bcIwccn Ihc buycr
nd Ihc scllcr Ihcy hvc cch 0Ihcr's muIul c0nIdcncc nd Irdc crcdI
bcc0mcs r0uInc cIvIy whch my bc pcr0dclly rcvcwcd by Ihc
supplcr.
Thc I0ll0wng my bc c0nsdcrcd, m0ng 0Ihcrs:
() T0 b00sI slcs.
(b) Typc 0I pr0ducI. !n Ngcr m0sI Irms dclng n I00d/
bcvcrgcs, c0smcIcs, dry pr0ducIs nd s0 0n rc uscd I0
grnIng Irdc crcdIs I0 Ihcr dsIrbuI0rs b0vc Ihcr dcp0sIs.
Thcsc dsIrbuI0rs n Iurn grnI crcdIs I0 Ihc wh0lcslcrs wh0
ls0 grnI crcdI I0 Ihc rcIlcrs. Ths s vcry c0mm0n m0ng
Ihc mrkcI w0mcn I Ihc mn mrkcIs such s 0kcArn,
0yngb0 nd s0 0n.
Thc Irms s0 nv0lvcd ncludc: PZ Cuss0ns Ngcr Plc, Unlcvcr
Ngcr Plc, NcsIlc Ngcr Plc, Cdbury Ng Plc, wmc0 nd
s0 0n.
338
(c) Lunchng 0I ncw pr0ducIs. Ths s I0 cnblc Ihc Irm I0
pcncIrIc nI0 Ihc mrkcI.
CrcdI Icrms rcIcr I0 Ihc c0ndI0n undcr whch Ihc supplcr sclls 0n
crcdI I0 Ihc buycr nd Ihc buycr s rcqurcd I0 py Ihc crcdI. Thcsc
c0ndI0ns ncludc Ihc duc dIc nd Ihc csh dsc0unI (I ny). Thc
s Ihc dIc by whch Ihc supplcr cxpccIs pymcnI whlc
Ihc s Ihc c0nccss0n 0IIcrcd I0 Ihc buycr I0 cnc0urgc
hm I0 mkc pr0mpI pymcnI. Thc Iypcl wy 0I cxprcssng crcdI
Icrms s, I0r cxmplc, s I0ll0ws. '2/0 ncI 30'. Ths mplcs IhI 2
pcrccnI dsc0unI s vlblc I Ihc crcdI s rcpd 0n Ihc 0Ih dy
nd n csc 0I Ilurc I0 mccI Ihc dcdlnc, pymcnI wll bc duc by
Ihc 30Ih dy.
whcrc Irdc dsc0unI s nv0lvcd, Ihc buycr sh0uld Ikc dccs0n
whcIhcr 0r n0I I0 Ikc dvnIgc 0I Ihc dsc0unI by c0mprng Ihc
0pp0rIunIy c0sI 0I I0rcg0ng csh dsc0unI wIh Ihc c0sI 0I 0Ihcr
s0urccs 0I crcdI c.g. bnk b0rr0wng. Ths c0uld bc d0nc by usng
Ihc cxmplc bcl0w:
Supp0sc EnIcrprscs s cxIcndcd N50,000 crcdI 0n Icrms 0I
'2/0 ncI 30'. ClculIc Ihc nIcrcsI rIc.
EnIcrprscs wll cIhcr py N50,000
|
.
|

\
|

000 , 50
x
00
2
= N50,000 N3,000 = N47,000 by Ihc cnd 0I Ihc
dsc0unI pcr0d .c 0Ih dy 0r Ihc Iull m0unI N50,000 by Ihc cnd
0I Ihc crcdI pcr0d .c 30Ih dy.
!I Ihc Irm I0rgvcs csh dsc0unI nd d0cs n0I py 0n Ihc 0Ih dy I
cn usc Ihc N47,000 I0r n ddI0nl pcr0d 0I 20 dys nd
mplcIly pyng N3,000 n nIcrcsI. !I crcdI 0I N47,000 s
vlblc I0r 20 dys by pyng N3,000 s nIcrcsI, Ihc nIcrcsI rIc
wll bc
20
3b0
x
47000
3000
ssumng 3b0 dys I0r Ihc ycr..
.c. 0.3b73 = 3b.73
339
Thc rIc my bc c0mprcd wIh Ihc bnk lcndng rIc nd I bcIIcr, I wll bc
rcs0nblc I0r Ihc c0mpny I0 Ikc dvnIgc 0I Ihc csh dsc0unI.
H0wcvcr, I c0mpny Ils I0 py 0n duc dIc, I wll bc sIrcIchng Is cc0unIs
pyblc. Ths my bc vcry c0sIly s I my IIccI Ihc crcdI w0rIhncss 0I Ihc
Irm nd my ls0 lcd I0 ncrcsc c0sI Ihr0ugh pymcnI 0I pcnlIy n I0rm
0I nIcrcsI.
() Unlkc 0Ihcr s0urccs 0I Inncc Irdc crcdI
s rclIvcly csy I0 0bIn hcncc, I s m0sIly uscd by smll
Irms whch gcncrlly Ind I dIIculI I0 rsc Iunds Ir0m Ihc
cpIl mrkcI.
(b) Trdc crcdI gr0ws wIh Ihc gr0wIh n Irm's slcs
(c) !I s n nI0rml, sp0nInc0us s0urcc 0I Inncc.
!I d0cs n0I rcqurc much ncg0II0n nd I0rml grccmcnI.
() !I nv0lvcs mplcI c0sI. Thc c0sI 0I crcdI my bc IrnsIcrrcd I0
Ihc buycr v Ihc ncrcscd prcc 0I g00ds supplcd I0 hm.
(b) L0ss 0I crcdI rIng (whcrc crcdI s buscd). Ths my lcd I0
supplcrs cIhcr, n0 m0rc cxIcndng crcdI 0r cnccllng I0Illy
crcdI supplcs I0 Ihc c0mpny.
!nvcsImcnI 0I Iunds n cc0unIs rcccvblc (dcbI0rs) s 0nc IuncI0n 0I Ihc
Inncl mngcrs 0I c0mpny nd nv0lvcs Irdc0II bcIwccn rsk nd
pr0IIblIy. !I 0Ihcr c0mpncs rc gvng crcdI nd c0mpny s n0I gvng,
IhI c0mpny wll bc l0sng pr0IIs I0 Is c0mpcII0rs. 0n Ihc 0Ihcr hnd I Ihc
cxIcns0n 0I crcdI s n0I pr0pcrly c0nIr0llcd by g00d crcdI c0llccI0n p0lccs
nd pr0ccdurcs Ihc c0mpny wll bc Icng subsInIl dcgrcc 0I rsk. Thcrc
s, IhcrcI0rc, nccd I0 dcIcrmnc Ihc 0pImum nvcsImcnI n dcbI0rs. Thc
dccs0n vrblcs IhI rc rcqurcd I0 csIblsh n 0pImum crcdI p0lcy
ncludc, crcdI sIndrds nd nlyss, crcdI Icrms nd c0llccI0n p0lcy nd
pr0ccdurcs.
!n 0rdcr I0 cnhncc Ihc cIIccIvcncss 0I crcdI mngcmcnI, mngcmcnI
my IcI0r 0uI s0mc 0I Ihc c0mpny's dcbIs I0 pr0Icss0nls. FcI0rng
Iypclly c0nvcrIs n0npr0ducIvc sscI nI0 pr0ducIvc 0nc nd s0mcImcs
scrvcs s wy 0I rsng Inncc by Ihc c0mpny. !I ls0 pr0IccIs Ihc c0mpny
gnsI dcIulI by dcbI0rs. Typcs 0I IcI0rng ncludc, Iull scrvcc n0n
340
rcc0ursc, Iull scrvcc wIh rcc0ursc, bulk/gcncy IcI0rng nd n0n
n0IIcI0n IcI0rng.
Thc nvcsImcnI n dcbI0rs s prIly Innccd by Irdc crcdI0rs. A c0mpny
IhI gvcs crcdI nd d0cs n0I Ikc crcdI s lkcly I0 bc vsIng Is bnkcrs
I0r 0vcrdrIIs Ir0m Imc I0 Imc. Ths, 0bv0usly, hs s0mc cIIccI 0n
pr0IIblIy. Trdc crcdI ppcrs I0 bc c0sIlcss s0urcc 0I Iunds. !n rclIy,
h0wcvcr, Irdc crcdI my ls0 hvc c0sI. Ths s whcrc c0mpny s gvcn
csh dsc0unI nd Ihc c0mpny d0cs n0I Ikc dvnIgc 0I Ihc dsc0unI. Thc
dvnIgcs 0I Irdc crcdI ncludc, csc 0I vlblIy, IlcxblIy, nd
nI0rmlIy. Thc dsdvnIgcs ncludc, p0ssbly hghcr c0sI (whcn c0mprcd
wIh csh purchscs), nd l0ss 0I crcdI rIng whch mghI cvcnIully rcsulI
n crcdI supplcs bcng cnccllcd wIh Ihc IIcndnI rcsulI 0n pr0IIblIy.
24.b
24.b.
. A Irm's crcdI nd c0llccI0n p0lccs c0mprsc Ihc I0ll0wng dccs0ns
EXCEPT
A ulIy 0I dcbIs
LcngIh 0I crcdI pcr0d
C Szc 0I csh dsc0unI
0 \0lumc 0I slcs
E C0sIs 0I c0llccI0n
2. Thc I0ll0wng rc Ihc s0urccs 0I crcdI nI0rmI0n EXCEPT
A !nsdcr nI0rmI0n Ir0m wIhn Ihc c0mpny
Fnncl sIIcmcnIs
C nk rcIcrcnccs
0 Trdc rcIcrcnccs
E CusI0mcrs crcdI burcu
3. Thc I0ll0wng rc Ihc IuncI0ns 0I IcI0r EXCEPT
A Advscs Ihc clcnI 0n crcdI cxIcns0n
MnIns cc0unIs I0r cusI0mcrs
C Pr0vdcs nI0rmI0n I0 clcnIs
34
0 Hclps Ihc clcnI I0 scll I0 cusI0mcrs
E Prcprcs crcdI nd c0llccI0n rcp0rIs
4. whch 0I Ihc I0ll0wng s N0T n dvnIgc 0I Irdng 0n crcdI!
() Esy vlblIy 0I crcdI
() FlcxblIy, s Irdc gr0ws wIh Ihc gr0wIh n Irm's slcs
() Cn bc uscd s c0llIcrl I0r l0n
A () 0nly
() 0nly
C () 0nly
0 () nd ()
E () nd ()
5. CusI0mcrs cn bc cIcg0rscd I0r Ihc purp0sc 0I nlysng crcdI,
cc0rdng I0:
() 000d cc0unIs
() 00rmnI cc0unIs
() 00ubIIul cc0unIs
A () 0nly
() nd ()
C () 0nly
0 () nd ()
E () nd ()
24.b.2
. SIIc Iw0 IcI0rs IhI musI bc Ikcn nI0 cc0unI n dcIcrmnng
c0mpny's 0pImum crcdI p0lcy
2. whI rc Ihc Iw0 spccIs 0I crcdI nlyss IhI dcIcrmnc Ihc qulIy 0I
dcbI0rs!
3. whI rc Ihc '3 Cs' 0I crcdI' I0 c0nsdcr whcn Irm s c0nsdcrng
whcIhcr 0r n0I I0 cxIcnd crcdI I0 cusI0mcr!
4. 0vc Ihc mcnng 0I Ihs crcdI Icrm: 2/0 ncI 45
5. McnI0n 0nc bcncII 0I IcI0rng c0mpny's dcbIs.
343
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ UndcrsInd Ihc m0Ivcs I0r nvcnI0ry c0nIr0l,
+ 0vc Ihc Iw0 m|0r mngcmcnI dccs0ns 0n nvcnI0ry c0nIr0l nd Ihc kcy
0b|ccIvc I0 bc chcvcd,
+ McnI0n Ihc Iw0 m|0r cIcg0rcs 0I sI0cks nv0lvcd n nvcnI0ry c0nIr0l nd
grphclly dcm0nsIrIc Ihcr bchv0ur,
+ 0cIcrmnc grphclly 0r clculIc Ihc cc0n0mc 0rdcr qunIIy,
+ ClculIc Ihc mn c0nIr0l lcvcls I0 whch mngcmcnI pys IIcnI0n, nd
+ Expln Ihc ncw ppr0ch I0 nvcnI0ry c0nIr0l Ihc 1usInTmc (1!T) ppr0ch.
!nvcnI0rcs c0nsIIuIc lrgc szc 0I Ihc w0rkng cpIl 0I busncss, hcncc,
I s bs0luIcly mpcrIvc I0 mngc I cIIccnIly nd cIIccIvcly I0 v0d
unncccssry nvcsImcnI. A Irm ncglccIng Ihc mngcmcnI 0I nvcnI0rcs
wll bc |c0prdzng Is l0ngrun pr0IIblIy nd my ulImIcly Il.
!I s p0ssblc I0r c0mpny I0 rcducc Is lcvcls 0I nvcnI0rcs I0 c0nsdcrblc
dcgrcc wIh0uI ny dvcrsc cIIccI 0n pr0ducI0n nd slcs by usng smplc
nvcnI0ry plnnng nd c0nIr0l Icchnqucs. Thc rcducI0n n cxccssvc
nvcnI0rcs crrcs Iv0urblc mpcI 0n c0mpny's pr0IIblIy.
!nvcnI0rcs rc sI0cks 0I Ihc pr0ducI c0mpny s mnuIcIurng I0r slc
nd Ihc c0mp0ncnIs IhI mkc up Ihc pr0ducI. F0r Irdng c0mpny,
nvcnI0ry s mdc up 0I Inshcd g00ds whlc I0r mnuIcIurng c0mpny,
Ihcrc rc vr0us I0rms 0I nvcnI0rcs, such s, rw mIcrls, w0rkn
pr0grcss nd Inshcd g00ds.
MnInng nvcnI0rcs nv0lvcs Iyng up 0I Ihc c0mpny's Iunds nd
ncurrcncc 0I sI0rgc nd hndlng c0sIs. !I s, IhcrcI0rc, cxpcnsvc I0
mnIn. why Ihcn d0 c0mpncs h0ld nvcnI0rcs! Amcy nd EggnI0n
(973) dcnIIcd Ihrcc rcs0ns s I0ll0ws:
344
() ThI s, I0 mccI dcmnd I0r Ihc sI0ck Icm,
whcrc Ihc szc 0I dcmnd s kn0wn wIh ccrInIy 0r rcplcnshmcnI 0I
sI0cks s mmcdIc whcn sI0ck0uI 0ccurs.
(2) ThI s, cIhcr (0r b0Ih) Ihc dcmnd I0r Ihc
sI0ck Icm 0r Ihc rcsupply 'lcdImc' s unccrIn bccusc I vrcs
bcIwccn 0nc 0ccs0n nd Ihc ncxI. T0 v0d cusI0mcr dssIsIcI0n
nd l0sI slcs 'buIIcr sI0cks' 0r 'sIcIy sI0cks' my bc hcld I0 rcducc
Ihc lkclh00d IhI Ihc c0mpny runs 0uI 0I supply.
(3) ThI s, dccs0n my bc Ikcn I0 ncrcsc
currcnI sI0cks n nIcpI0n 0I prcc rsc, s0 s I0 mkc spcculIvc
pr0II. Thc m|0r c0nIr0l ssuc I0r spcculIvc sI0ck h0ldng s
dmnsIrIvc: Ihcrc s clcr nccd I0 cnsurc IhI lmIs I0 Irm's
Inncl rsks n spcculIvc sI0ckh0ldng rc csIblshcd nd
0bscrvcd.
A c0mpny sh0uld mnIn suIIccnI sI0ck 0I rw mIcrls I ny gvcn
Imc I0 sIrcmlnc pr0ducI0n. Ths s mp0rInI sncc I s n0I p0ssblc I0r
c0mpny I0 pr0curc rw mIcrls whcncvcr I s rcqurcd bccusc 0I Ihc
Imc lg bcIwccn Ihc dcmnd I0r mIcrls nd Is supply. Thc purchsc
nd dclvcry 0I mIcrls my ls0 bc dclycd bccusc 0I sIrkc, Irnsp0rI
dsrupI0n 0r sh0rI supply.
AprI Ir0m Ihc dcly, Irm my wnI I0 purchsc nd h0ld sI0ck 0I rw
mIcrls n 0rdcr I0 Ikc dvnIgc 0I qunIIy dsc0unIs nd ls0 bccusc
0I nIcpIcd prcc ncrcsc.
H0wcvcr, w0rknpr0grcss nvcnI0ry usully bulds up bccusc 0I Ihc
pr0ducI0n cyclc, IhI s, Ihc Imc spn bcIwccn nIr0ducI0n 0I rw mIcrls
nI0 pr0ducI0n nd cmcrgcncc 0I Inshcd g00ds hcncc n cIIccnI Irm
sh0uld Iry I0 mkc pr0ducI0n cyclc smllcr, by mpr0vcd Icchnqucs.
0n Ihc 0Ihcr hnd, sI0ck 0I Inshcd g00ds rc usully mnIncd I0r suddcn
dcmnds Ir0m cusI0mcrs bccusc Irm cnn0I pr0ducc mmcdIcly whcn
g00ds rc dcmndcd by cusI0mcrs.
A subsInIl sI0ck 0I Inshcd g00ds s ls0 mnIncd by Irms dclng n
scs0nl g00ds I0 mccI Ihc pck dcmnd. 0Ihcrwsc, Ilurc I0 supply g00ds
I0 cusI0mcrs whcn dcmndcd my lcd I0 l0ss 0I Ihc Irm's slcs I0
c0mpcII0rs.
ThcrcI0rc, Ihc lcvcl 0I sI0ck 0I Inshcd g00ds w0uld dcpcnd up0n Ihc c0
0rdnI0n bcIwccn slcs nd pr0ducI0n s wcll s Ihc pr0ducI0n Imc.
345
T
Thc b0vc dscuss0ns clcrly sh0w IhI Ihc Irm s Iccd wIh Iw0 c0nIlcIng
nccds, IhI s:
() T0 mnIn lrgc szc 0I sI0ck (nvcnI0ry) I0r cIIccnI nd sm00Ih
pr0ducI0n nd slcs 0pcrI0ns, nd
(b) T0 mnIn mnmum nvcsImcnI n sI0ck I0 mxmsc pr0IIblIy.
Sncc I hs bccn csIblshcd IhI Ihc Irm's 0b|ccIvc s I0 mxmzc Ihc
shrch0ldcrs wclIh, Ihc 0b|ccIvc 0I nvcnI0ry mngcmcnI sh0uld IhcrcI0rc
bc I0 dcIcrmnc nd mnIn 0pImum lcvcl 0I nvcsImcnI n nvcnI0rcs.
Ths c0uld 0nly bc chcvcd I Ihc Irm s blc I0 v0d cxccssvc nd
ndcquIc lcvcl 0I nvcnI0rcs nd mnIn suIIccnI nvcnI0ry I0r Ihc
sm00Ih pr0ducI0n nd slcs 0pcrI0ns. !n cIIccI, Ihc Irm sh0uld lwys
v0d sIuI0n 0I 0vcr nvcsImcnI 0r undcr nvcsImcnI n nvcnI0rcs. Thus,
Ihc 0pImum lcvcl 0I Ihc Irm's nvcnI0ry sh0uld lc bcIwccn Ihc Iw0 p0nIs 0I
cxccssvc nd ndcquIc nvcnI0rcs.
H0wcvcr, n cIIccIvc nvcnI0ry mngcmcnI sh0uld:
() Ensurc c0nInu0us supply 0I rw mIcrls I0 IclIIc unnIcrrupIcd
pr0ducI0ns,
(b) MnIn suIIccnI sI0cks 0I rw mIcrls n pcr0ds 0I sh0rI supply
nd nIcpIc prcc chngcs:
(c) MnIn suIIccnI Inshcd g00ds nvcnI0ry I0r sm00Ih slcs 0pcrI0n
nd cIIccnI cusI0mcr scrvcc,
(d) Mnmsc Ihc crryng c0sI nd Imc, nd
(c) C0nIr0l nvcsImcnI n nvcnI0rcs nd kccp I I n 0pImum lcvcl.
Thc m|0r dngcrs 0I 0vcr nvcsImcnI n sI0cks rc:
() Unncccssry Icup 0I Ihc Irm's Iunds nd l0ss 0I pr0II. Ths nv0lvcs
n 0pp0rIunIy c0sI s Ihc Iund's Icd up cnn0I bc uscd I0r ny 0Ihcr
purp0sc
(b) Exccssvc crryng c0sIs such s Ihc c0sIs 0I sI0rgc, hndlng,
nsurncc, rcc0rdng nd nspccI0n cIc Ihcsc c0sIs wll ncrcsc n
pr0p0rI0n I0 Ihc v0lumc 0I nvcnI0ry nd wll IhcrcI0rc mpr Ihc
Irms pr0IIblIy.
34b
(c) Chnccs 0I l0ss 0I lqudIy. !I my n0I bc p0ssblc I0 scll nvcnI0rcs
(prIculrly rw mIcrls) n Imc nd I Iull vluc I cxccssvc
nvcnI0rcs rc crrcd I0r l0ng pcr0d cxccpI undcr c0ndI0ns 0I
nIlI0n nd scrcIy.
(d) Physcl dcIcr0rI0n 0I nvcnI0rcs. !n csc 0I ccrIn g00ds 0r rw
mIcrls, dcIcr0rI0n 0ccurs wIh Ihc pssgc 0I Imc, ls0
mshndlng nd mpr0pcr sI0rgc IclIcs my ls0 lcd I0
dcIcr0rI0n.
Thc dngcrs 0I undcrnvcsImcnI n nvcnI0rcs rc:
() !ndcquIc rw mIcrls nd w0rkn
pr0grcss nvcnI0rcs wll rcsulI n IrcqucnI pr0ducI0n nIcrrupI0ns
(b) whcn Inshcd g00ds
nvcnI0rcs rc n0I suIIccnI I0 mccI Ihc dcmnd 0I cusI0mcrs
rcgulrly, Ihcy my shII I0 c0mpcII0rs nd Ihs wll rcsulI nI0 l0ss
0I slc Ihcrcby IIccIng Ihc pr0IIblIy 0I Ihc Irm.
T0 mngc nvcnI0rcs cIIccnIly, wll rcqurc s0luI0ns I0 Ihc I0ll0wng Iw0
qucsI0ns.
() Ihs rclIcs I0 Ihc pr0blcm 0I
dcIcrmnng Ihc cc0n0mc 0rdcr qunIIy (E0) whch rcqurcs Ihc
nlyss 0I c0sIs 0I mnInng ccrIn lcvcl 0I nvcnI0rcs
(b) Ihs rscs bccusc 0I unccrInIy
nd I rcqurcs dcIcrmnng Ihc rc0rdcr p0nI
Ths s Ihc nvcnI0ry lcvcl whch mnmscs Ihc I0Il 0I 0rdcrng nd
crryng c0sIs. !I s Ihc 0pImum nvcnI0ry szc, IhI s, Ihc 0rdcr szc
I whch nnul I0Il c0sIs 0I 0rdcrng nd h0ldng rc Ihc mnmum.
Thcrc rc Ihrcc ppr0chcs I0 dcIcrmnng Ihc cc0n0mc 0rdcr
qunIIy (E0). Thcsc rc: Ihc Irl nd crr0r ppr0ch, Ihc I0rmul
ppr0ch nd Ihc grphc ppr0ch.
!n dcIcrmnng Ihc cc0n0mc 0rdcr qunIIy (E0), I s ssumcd IhI
I0Il nnul dcmnd s kn0wn wIh ccrInIy nd usgc 0I mIcrls
s sIcdy. Als0, Ihc 0rdcrng c0sI pcr 0rdcr nd crryng c0sI pcr unI
rc ssumcd I0 bc c0nsInI.
347
() 0rdcrng c0sIs s uscd n csc 0I rw mIcrls
(0r supplcs) nd ncludcs c0sIs ncurrcd n Ihc I0ll0wng
cIvIcs: rcqusI0nng, purchsc 0rdcrng, Irnsp0rIng,
rcccvng, nspccIng nd sI0rng. Thc c0sI ncrcscs n
pr0p0rI0n I0 Ihc numbcr 0I 0rdcrs plccd, Ihus, Ihc m0rc
IrcqucnIly nvcnI0ry s cqurcd, Ihc hghcr Ihc Irms 0rdcrng
c0sIs. 0n Ihc 0Ihcr hnd, I Ihc Irm mnIns lrgc nvcnI0ry
lcvcls, Ihcrc wll bc Icw 0rdcrs plccd nd 0rdcrng c0sIs wll
bc rclIvcly smll. ThcrcI0rc, 0rdcrng c0sIs dccrcsc wIh
ncrcsng szc 0I nvcnI0ry
(b) Ths s Ihc c0sIs ncurrcd I0r
mnInng gvcn lcvcl 0I nvcnI0ry. Thcsc c0sIs ncludc
sI0rgc (wrch0usng c0sIs, sI0rcs hndlng c0sIs nd clcrcl
sIII c0sI cIc) nsurncc, Ixcs, dcIcr0rI0n nd 0bs0lcsccncc.
Thc Ihrcc ppr0chcs I0 dcIcrmnng Ihc cc0n0mc 0rdcr qunIIy (E0) cn
bc llusIrIcd s I0ll0ws:
0vcn Ihc I0ll0wng dI I0r Irm:
EsImIcd mIcrl nnul rcqurcmcnI (A) = b00 unIs
Purchsng c0sI pcr unI N20 (P)
Crryng c0sI pcr unI (C) N2.00
0rdcrng c0sI pcr 0rdcr 0 N40.00
0cIcrmnc Ihc cc0n0mc 0rdcr qunIIy (E0) usng
() Thc Irl nd crr0r ppr0ch
(b) F0rmul ppr0ch
(c) Thc grphc ppr0ch
0rdcr szc ()unIs b00 300 200 50 20 00
Avcrgc !nvcnI0ry (/2)unIs 300 50 00 75 b0 50
N0 0I 0rdcrs A/ 2 3 4 5 b
Annul Crryng c0sIs C x /2N b00 300 200 50 20 00
Annul 0rdcrng c0sI 0 x A/ N 40 80 20 b0 200 240
T0Il Annul C0sIs (N) b40 380 320 30 320 340
348
Thc b0vc c0mpuII0ns sh0w IhI Ihc I0Il nnul c0sI s mnmum, .c
N30, whcn Ihc numbcr 0I 0rdcrs n Ihc ycr s 4. Thc cc0n0mc 0rdcr qunIIy,,
IhcrcI0rc, s 50 unIs.
Thc Irl nd crr0r 0r nlyIcl ppr0ch s s0mcwhI Icd0us I0 clculIc
Ihc E0. Thc csy wy s I0 usc Ihc 0rdcrI0rmul ppr0ch.
Ths ppr0ch s dcrvcd Ir0m Ihc I0rmul:
C
A0 2
rcprcscnIs nnul rcqurcmcnI (nnul dcmnd)
rcprcscnIs 0rdcrng c0sI pcr 0rdcr
crryng c0sI pcr unI
ThcrcI0rc subsIIuIng I0r A, 0 nd C n Ihc I0rmul, Ihc E0
wll bc
2
40 x b00 x 2
=
000 , 24
= 54.92
~
Usng Ihc Irl nd crr0r dI, Ihc E0 cn bc prcscnIcd grphclly
s I0ll0ws:
0
0rdcrng Szc
0rdcrn
g
C0sI
C

r
r
y

n
g
C
0
s
I
T
0
I

l
C
0
s
I
00 200 300 400 500 b00
00
200
300
400
500
b00
700
*
E0 = P0nI * = 55 unIs
349
Thc cc0n0mc 0rdcr qunIIy E0 nswcrs Ihc qucsI0n 0I h0w much
I0 0rdcr buI Ihc qucsI0n, whcn I0 0rdcr hs n0I ycI bccn nswcrcd.
Ths s pr0blcm 0I dcIcrmnng Ihc rc0rdcr p0nI.
()
Rc0rdcr p0nI s Ihc nvcnI0ry lcvcl I whch n 0rdcr sh0uld
bc plccd I0 rcplcnsh nvcnI0ry. !I s Ihc lcvcl IhI wll bc
mnIncd I0r c0nsumpI0n durng Ihc lcd Imc. T0 bc blc I0
d0 Ihs undcr ccrInIy, I wll bc ncccssry I0 kn0w:
() Thc lcd Imc, IhI s, Ihc Imc I Ikcs I0 rcplcnsh
nvcnI0ry whcn n 0rdcr s plccd,
() Avcrgc usgc, nd
() Ec0n0mc 0rdcr qunIIy E0.
whcn Ihcrc s n0 IlucIuI0n n Ihc usgc nd lcd Imc (IhI
s, undcr ccrInIy), Ihc rc0rdcr p0nI wll bc: lcd Imc x
vcrgc usgc.
ThI s: Rc0rdcr p0nI = lcd Imc x vcrgc usgc.
Assumng IhI Ihc cc0n0mc 0rdcr qunIIy s 300 unIs nd vcrgc
usgc s 30 unIs pcr wcck.
ClculIc Ihc rc0rdcr p0nI whcn Ihc lcd Imc s 0 nd whcn Ihc
lcd Imc s 3wccks.
!I Ihc vcrgc usgc s 30 unIs pcr wcck, Ihcn I wll Ikc 0 wccks I0
usc Ihc 300 unIs, IhI s, 300/30 wks = 0 wccks
whcn Ihc lcd Imc s 0
Thc rc0rdcr p0nI = 0 .c. 0 x 3 wks
!n IhI csc Ihc 0rdcr sh0uld bc plccd I Ihc cnd 0I Ihc 0Ih wcck
sncc Ihcrc s n0 lcd Imc
H0wcvcr, whcn Ihc lcd Imc s 3wks, Ihc 0rdcr sh0uld bc plccd 3
wccks bcI0rc Ihc Inl usgc 0I Ihc E0 .c. 0 wks 3 wks = 7wks,
IhI s, whcn Ihc E0 rcmns 3 x 30unIs, IhI s, 90 unIs.
350
!n csc 0I unccrInIy I s dIIculI I0 prcdcI usgc nd lcd
Imc ccurIcly sncc dcmnd I0r mIcrls my IlucIuIc Ir0m
Imc I0 Imc. !I Ihc usgc ncrcscs nd Ihc dclvcry 0I nvcnI0ry
s dclycd, Ihc Irm cn Icc pr0blcm 0I sI0ck0uI whch cn
pr0vc I0 bc c0sIly. !n 0rdcr I0 gurd gnsI sI0ck0uI Ihc
Irm my mnIn sIcIy sI0ck s cush0n gnsI cxpccIcd
ncrcscd usgc nd/0r dcly n dclvcry Imc:
ThcrcI0rc, Ihc I0rmul I0 dcIcrmnc Ihc rc0rdcr lcvcl whcn
sIcIy sI0ck s mnIncd wll chngc s0 s I0 nc0rp0rIc Ihc
sIcIy sI0ck. Thc ncw rc0rdcr lcvcl I0rmul wll bc:
Rc0rdcr p0nI = Lcd Imc x vcrgc usgc + SIcIy SI0ck
Usng llusIrI0n 25.2 nd ssumng rcs0nblc cxpccIcd sI0ck0uI s
5unIs pcr wcck, Ihc Irm sh0uld mnIn 45unIs .c. (5unIs x 3wccks).
Thus, Ihc rc0rdcr lcvcl wll bc 90unIs + 45unIs = 35unIs whlc Ihc
mxmum nvcnI0ry wll bc E0 + sIcIy sI0ck .c. (300 +45) unIs =
345unIs.
1usI!nTmc s sysIcm n whch Irm purchscs mIcrls nd prIs nd
pr0duccs c0mp0ncnIs |usI whcn Ihcy rc nccdcd n Ihc pr0ducI0n pr0ccss,
Ihc g0l bcng I0 hvc zcr0 nvcnI0ry bccusc h0ldng nvcnI0ry s n0nvluc
ddcd cIvIy.
1usI!nTmc s ncw c0mpuIcr Icchn0l0gclly bscd sysIcm 0I nvcnI0ry
c0nIr0l cv0lvcd n Ihc 1pncsc mnuIcIurng sysIcms wIh Ihc cr0nym
1!T. Thc mn 0b|ccIvc 0I 1!T ws I0 kccp Ihc lcvcl 0I nvcnI0ry I Ihc brcsI
mnmum (I n0I I zcr0). Thc nIcnI0n ws I0 c0nInully rcducc Ihc 0rdcrng
c0sIs, whch E0 ssumcd I0 bc Ixcd, I0 lcvcl whcrc E0 wll bc rcduccd
I0 sy unI. Thc phl0s0phy bchnd 1!T h0lds Ihc vcw IhI Ihcsc
c0sI rcducI0n cII0rIs w0uld ls0 rcducc (I n0I cxpungcd) sIcIy sI0ck nd
Ihcr IIcndnI c0sIs. Thc blIy 0I c0mpny I0 cIulsc Ihc 1!T drcm
w0uld, h0wcvcr, dcpcnd 0n Ihc nIurc 0I Ihc c0mpny's mnuIcIurng
pr0ccss nd Ihc cusI0m nd culIurc 0I Ihc ndusIry Ir0m whch I gcIs Is
supplcs.
1usI !n Tmc mnuIcIurng nv0lvcs 0bInng g00ds Ir0m supplcrs I Ihc
lIcsI p0ssblc Imc (.c. whcn Ihcy rc nccdcd 0n Ihc pr0ducI0n Imc) Ihcrcby
v0dng Ihc nccd I0 crry ny mIcrls 0r c0mp0ncnIs nvcnI0ry. Rcduccd
35
nvcnI0ry lcvcls mcn IhI l0wcr lcvcl 0I nvcsImcnI n w0rkng cpIl
wll bc rcqurcd n ccrIn cnvr0nmcnI whcrc Ihc c0sI 0I sI0ck 0uI s hgh.
1!T s ppr0prIc, I0r cxmplc n h0spIl, whcrc Ihc c0sI 0I sI0ck0uI I0r
ccrIn Icms c0uld bc IIl. Thc mn IcIurcs 0I 1!T sysIcm ncludc Ihc
I0ll0wng:
() 0clvcrcs wll bc smll nd IrcqucnI, rIhcr Ihn n bulk. Pr0ducI0n
runs wll ls0 bc sh0rIcr.
(b) Supplcr rclI0nshp musI bc cl0sc sncc hgh dcmnds wll bc plccd
0n supplcrs I0 dclvcr 0n Imc nd wIh 00 pcrccnI qulIy.
(c) UnI purchsng prccs my nccd I0 bc hghcr Ihn n c0nvcnI0nl
sysIcm I0 c0mpcnsIc supplcrs I0r Ihcr nccd I0 h0ld hghcr nvcnI0rcs
nd I0 mccI m0rc rg0r0us qulIy nd dclvcry rcqurcmcnIs.
(d) Pr0ducI0n pr0ccss mpr0vcmcnIs my bc rcqurcd I0r 1!T sysIcm I0
IuncI0n I0 Iull cIIccIvcncss. !n prIculr, scIup Imc I0r mchncry
my hvc I0 bc rcduccd, w0rkI0rcc Icms rc0rgnscd nd m0vcmcnI
0I mIcrls wIhn Ihc pr0ducI0n pr0ccss mnmscd.
Thc Inncc mngcr hs n0 0pcrIng rcsp0nsblIy I0 c0nIr0l nvcnI0ry.
Thc Inncl mngcr's r0lc s I0 nlysc Ihc bchv0ur 0I nvcnI0ry nd
rcp0rI Is mplcI0ns I0 0pcrIng mngcrs. Hc sh0uld scc IhI n 0pImum
m0unI 0I Iunds s nvcsIcd n nvcnI0ry nd sh0uld ls0 bc Imlr wIh Ihc
nvcnI0ry c0nIr0l Icchnqucs.
Thc m s I0 rcducc nvcnI0ry nvcsImcnI nd ncrcsc Ihc Irms pr0spccIs
0I mkng m0rc pr0IIs Ihcrcby sIsIyng Ihc shrch0ldcrs wclIh
mxmsI0n 0b|ccIvc 0I Ihc Irm.
!nvcnI0rcs c0nsIIuIc m|0r c0mp0ncnI 0I Ihc currcnI sscIs 0I Ihc c0mpny.
Thcy, IhcrcI0rc, nccd I0 bc sIuIcly mngcd nd c0nIr0llcd. Lck 0I pr0pcr
mngcmcnI my rcsulI n b0Ih sh0rI nd l0ngrun dvcrsc cIIccI 0n Ihc
pr0IIblIy 0I Ihc c0mpny.
Thc c0nIr0l 0I nvcnI0ry, Ir0m Ihc sIndp0nI 0I mngcmcnI nv0lvcs m|0r
dccs0nsdcIcrmnng Ihc cc0n0mc 0rdcr qunIIy (E0) nd dcIcrmnng
Ihc ppr0prIc c0nIr0l lcvcls. 0Ih dccs0ns musI bc such IhI Ihc vluc 0I
Ihc c0mpny s ncrcscd, 0r I Ihc lcsI mnIncd.
!I nvcnI0ry c0nIr0l w0uld nv0lvc such cII0rIs nd c0sI 0n Ihc prI 0I
mngcmcnI, why d0cs c0mpny nccd I0 kccp sI0cks I ll! SI0cks lkc
352
csh, rc kcpI I0r Ihrcc mn m0Ivcs IrnscI0ns, prccuI0nry nd
spcculIvc. Thc 0b|ccIvc I0 bc chcvcd by Ihc b0vc dccs0ns rc I0 v0d
cxccss sI0cks nd I0 v0d n0I hvng cn0ugh sI0cks. MngcmcnI, n kccpng
cxccss sI0cks, w0uld bc ncurrng s0mc c0sIs, prncplly, nIcrcsI 0n cpIl
Icd d0wn, rcnI nd nsurncc 0I wrch0usc, plIcrgc, 0bs0lcsccncc nd s0
0n. Thcsc rc kn0wn s sI0ck h0ldng c0sIs. 0n Ihc 0Ihcr hnd, whcn
mngcmcnI kccps ndcquIc sI0cks, Ihcrc mghI bc l0sI slcs, dsrupI0n
n pr0ducI0n runs, l0ss 0I d0cumcnI, l0ss 0I cusI0mcr g00dwll nd s0 0n.
Thcsc rc cllcd 0rdcrng c0sIs. Thcsc Iw0 cIcg0rcs 0I c0sIs rc drmIclly
0pp0scd I0 cch 0Ihcr. whcn 0nc cIcg0ry 0I c0sIs s rsng (h0ldng c0sIs)
wIh rcspccI I0 ncrcsc n qunIIy 0rdcrcd, Ihc 0Ihcr (0rdcrng c0sIs) s
Illng. Thc 0pImum lcvcl 0I Ihc qunIIy 0rdcrcd (hcrcn rcIcrrcd I0 s Ihc
cc0n0mc 0rdcr qunIIy) s IhI qunIIy I whch Ihc ggrcgIc 0I Ihc Iw0
cIcg0rcs 0I c0sIs s mnmscd. AI Ihs lcvcl Ihc vluc 0I Ihc c0mpny s
prcsumbly mxmscd. Thc E0 ws dcscrbcd b0Ih mIhcmIclly nd
grphclly.
Thc rclcvnI c0nIr0l lcvcls I0 whch mngcmcnI musI py IIcnI0n rc Ihc
rc0rdcr lcvcl (0r p0nI), mnmum lcvcl nd mxmum lcvcl 0I sI0cks. Thc
rc0rdcr lcvcl gvcs Ihc rghI Imc mngcmcnI sh0uld plcc n 0rdcr, Ihc
mnmum lcvcl sh0ws Ihc lcvcl 0I sIcIy sI0cks, IhI s, Ihc lcvcl bcl0w whch
mghI crcIc pr0blcm 0I sI0ck0uI I0r Ihc c0mpny nd mxmum lcvcl Ihc
lcvcl b0vc whch IurIhcr nvcsImcnI w0uld m0unI I0 wsIcIul nvcsImcnI
nd IhcrcI0rc l0ss 0I vluc I0 Ihc c0mpny.
!n |usInImc sysIcm Ihcrc sh0uld bc n0 lcd Imc IhI s Ihc lcdImc
sh0uld bc zcr0. Thc sysIcm ssumcs IhI mmcdIcly n 0rdcr s plccd,
Ihc g00ds rc supplcd.
Thc m|0r c0nccrn 0I Ihc Inncl mngcrs s n0I s0 much 0I Ihc dyI0
dy dmnsIrIvc c0nIr0l 0I nvcsImcnI buI 0I Ihc nccd I0 mnmsc Ihc
c0sIs 0I nvcsImcnI n sI0cks, s0 IhI Ihc l0ngrun pr0IIblIy 0I Ihc c0mpny
cn bc mxmscd.
25..
Usc Ihc I0ll0wng nI0rmI0n I0 nswcr qucsI0ns nd 2
Annul dcmnd I0r mIcrl K s: 0,000 unIs.
SI0ck h0ldng c0sI pcr unI pcr nnum: 50k
Ec0n0mc 0rdcr unIIy: 3b2 unIs
0rdcrng c0sI pcr 0rdcr: N250
0rdcrs rc plccd n m0nIhs.
353
. H0w 0IIcn rc 0rdcrs plccd!
A. Evcry b m0nIhs
. M0nIhly
C. 0ncc n m0nIh
0. Evcry 3 m0nIhs
E. Evcry 4 m0nIhs
2. whI s Ihc I0Il 0rdcrng c0sIs I0r Ihc ycr!
A. N790.b0
. N,000.b0
C. N250.b0
0. N40.b0
E. N2.b0
3. Fr0m Inncl mngcmcnI sIndp0nI, whI s Ihc mn 0b|ccIvc 0I
sI0ck c0nIr0l!
A. Mxmsc I0Il nvcsImcnI n sI0cks
. Mnmsc Ihc 0rdcrng c0sI
C. Mnmsc Ihc h0ldng c0sI
0. Mnmsc Ihc I0Il nvcsImcnI n sI0cks
E. Mxmsc Ihc nnul dcmnd
4. whch 0I Ihc I0ll0wng s Ihc m0sI mp0rInI nvcnI0ry h0ldng c0sI!
A. F0rg0nc qunIIy dsc0unI
. L0ss 0I cusI0mcrs g00dwll
C. L0sI slcs 0pp0rIunIy c0sIs
0. !nIcrcsI 0n cpIl
E. Trnsp0rII0n c0sIs
5. whch s rc0rdcr lcvcl!
A. (Mnmum usgc x mnmum lcd Imc) + E0
. (Avcrgc usgc x vcrgc lcd Imc) + sIcIy sI0cks
C. (Avcrgc usgc x vcrgc lcd Imc) + E0
0. Mxmum usgc (vcrgc usgc x vcrgc lcd Imc)
E. Mxmum usgc x mnmum lcd Imc.
25..2
. !n nvcnI0ry c0nIr0l, sIrIcgc dccs0n IhI ms I ncr zcr0 nvcnI0ry
lcvcl s rcIcrrcd I0 s __________________
2. SIIc 0NE n0nm0ncIry IcI0r IIccIng Ihc cc0n0mc 0rdcr qunIIy.
3. whI nmc s gvcn I0 Ihc mnmum sI0ck lcvcl!
4. !n sI0ck c0nIr0l, whI s lcd Imc!
5. !n Icrms 0I nvcnI0ry c0sIs, whI s Ihc 0pIml 0rdcr qunIIy!
355
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ Expln Ihc c0nccpIs 0I "mcrgcrs" nd "cqusI0ns" (M&A),
+ Expln Ihc Icrm syncrgy s I rclIcs I0 M&A,
+ SIIc nd cxpln Ihc m0Ivcs I0r g0ng nI0 mcrgcr rrngcmcnI,
+ SIIc nd cxpln Ihc Ihrcc mn Iypcs 0I mcrgcr.
+ UndcrsInd Ihc pr0ccss 0I vlung wh0lc c0mpny,
+ Expln Ihc c0nccpIs 0I 'sIrIcgc cqusI0n nd Inncl cqusI0ns,
+ EvluIc Ihc mpcI 0I sIrIcgc cqusI0ns 0n Ihc shrch0ldcrs 0I cch 0I Ihc Iw0
c0mpncs nv0lvcd n mcrgcr,
+ Expln Ihc mcIh0ds 0I Inncng mcrgcrs,
+ Kn0w Ihc Icrm 'h0sIlc Ikc0vcr,
+ SIIc nd cxpln Ihc p0ssblc dcIcnscs gnsI h0sIlc Ikc0vcrs,
+ SIIc nd cxpln nIIkc0vcr dcvccs,
+ Kn0w Ihc IcI0rs n sscssng Ihc succcss 0I mcrgcrs, nd
+ !Icmsc Ihc lcgl c0ndI0ns prcccdcnI I0r schcmcs 0I mcrgcrs.
C0rp0rIc rcsIrucIurng 0ccurs whcn c0mpny crrcs 0uI IundmcnIl
chngc n Ihc sIrucIurc 0I Is 0pcrI0ns 0r Is Inncl p0sI0n Is
nvcsImcnIs n Ihc sscIs 0I Ihc c0mpny nd Ihc wy nd mnncr Ih0sc
nvcsImcnIs rc Innccd. Ths my rsc Ir0m cIhcr chngc n Ihc cc0n0mc
cnvr0nmcnI n whch I 0pcrIcs 0r n Ihc 0b|ccIvcs I crlcr scI I0r IsclI.
0nc wy by whch such chngc cn c0mc s Ihr0ugh mcrgcrs nd
cqusI0ns (M&A).
!I sh0uld bc n0Icd IhI ny I0rm 0I rcsIrucIurng IhI s crrcd 0uI by Ihc
c0mpny sh0uld scck I0 dd vluc, Ihcrcby mxmsng shrch0ldcrs' wclIh.
35b
0nc mcIh0d c0mpny I0ll0ws n chcvng gr0wIh, prI Ir0m nIcrnl
nvcsImcnI n Ixcd sscIs, s I0 buy busncss 0rgnsI0n s wh0lc, Ths
s d0nc Ihr0ugh mcrgcr 0r cqusI0n. AlIh0ugh, uscd nIcrchngcbly,
Ihcrc s slghI dIIcrcncc bcIwccn Ihc Iw0. A 'mcrgcr' 0ccurs whcn Iw0
scprIc c0mpncs |0n I0gcIhcr I0 I0rm snglc 0nc. Hcrc Ihc Iw0 c0mpncs
g0 nI0 lqudI0n nd n cnIrcly ncw 0nc s I0rmcd I0 cqurc Ihcr shrcs.
AlIcrnIvcly Ihc lIc 0I 0nc c0mpny s, n lw, IcrmnIcd (sIll n physcl
cxsIcncc s dvs0n 0r brnch) nd Ihc 0Ihcr 0nc rcmns
An cqusI0n 0r Ikc0vcr 0ccurs whcn 0nc c0mpny buys shrcs n n0Ihcr
c0mpny subsInIl cn0ugh I0 cqurc c0nIr0llng nIcrcsI. Thc I0rmcr s
cllcd Ihc bddng c0mpny whlc Ihc lIIcr s cllcd Ihc IrgcI c0mpny.
Syncrgy rcIcrs I0 Ihc cIIccIs (syncrgsIc cIIccIs) 0I c0mbnng rcs0urccs
nsIcd 0I usng Ihcm ndcpcndcnIly. Any mcrgcr sh0uld crcIc (syncrgy) n
0rdcr I0 dd vluc. Thc c0nccpI, usully cxprcsscd s 2+2=5 sIIcs IhI
c0mbnI0n 0I npuIs pr0duccs grcIcr 0uIpuI Ihn Ihc sum 0I Ihc scprIc
ndvdul 0uIpuI.
Thc I0ll0wng IcI0rs hvc bccn dvnccd s rcs0ns I0r mcrgcrs:
()
Mcrgcr my crcIc grcIcr cccss I0 Ihc mrkcI I0r Ihc bddng
c0mpny Ihcrcby, c0nInully ncrcsng slcs.
(b)
Thc IrgcI c0mpny my bc Ihc supplcr 0I crIcl rw mIcrl I0r
Ihc bddng c0mpny. Thc lIIcr my wnI I0 pr0IccI 0r c0nIr0l Ihs
s0urcc I0 cnsurc c0nInucd supply.
(c)
whcrc Ihc Iw0 c0mpncs c0mpcIc n Ihc smc mrkcI I0r Ihcr 0uIpuI,
mcrgcr my brng lrgcr mrkcI shrc whch my cnblc Ihc
cnlrgcd c0mpny I0 rsc prccs wIh0uI cuI n slcs v0lumc.
(d)
Thcsc rc dvnIgcs I0 bc gncd Ir0m 0pcrIng 0n lrgc sclc.
Thcy c0mc n I0rm 0I l0wcr prccs bcng pd I0r rw mIcrls, l0wcr
scI up c0sIs Ir0m lrgc pr0ducI0n runs nd s0 0n.
357
(c)
Thc sscIs 0I Ihc IrgcI c0mpny my cIhcr bc undcruIlscd 0r
unIppcd bccusc 0I p00r mngcmcnI. Ths wll crcIc n 0pp0rIunIy
I0r Ihc bddng c0mpny I0 n|ccI bcIIcr nd skllcd mngcrs I0 cnblc
Ihc IrgcI c0mpny's p0IcnIls I0 bc dsc0vcrcd nd Iully uIlscd.
(I)
Hcrc, Ihc bddng c0mpny mcrgcs wIh n0Ihcr c0mpny n I0Illy
dIIcrcnI cIvIy n 0rdcr I0 mkc up I0r Ill n Is IrdI0nl c0rc
busncss 0r I0 rcducc Ihc rsk rsng Ir0m cyclcl svngs n rcIurns.
y d0ng Ihs I s bclcvcd IhI Ihc Iw0 c0mpncs' rcIurns w0uld n0I
bc pcrIccIly c0rrclIcd.
(g)
A mcrgcr nn0unccmcnI my bc p0sIvc sgnl IhI Ihc c0mpny's
IuIurc p0IcnIl s bg. T0 Ihc cxIcnI IhI Ihc c0mpny's shrc s
undcrvlucd (IhI s cIul mrkcI prcc s lcss Ihn Is nIrsc vluc)
nI0rmI0n b0uI n mpcndng mcrgcr my |crk up Ihc mrkcI prcc.
(h)
A c0mpny n hgh rsk ndusIry wIh hgh lcvcl 0I crnngs n rclI0n
I0 Is ncI sscIs, my wnI I0 mIgIc Is rsk by cqurng n0Ihcr
c0mpny wIh l0I 0I sscIs.
()
Smlrly, c0mpny my mpr0vc Is rsk c0mplcx0n by cqurng
n0Ihcr c0mpny wIh m0rc sIblc crnngs.
(|)
Thc cqurng c0mpny's lqudIy mghI mpr0vc I Ihc IrgcI c0mpny
hs subsInIl 'Ircc csh Il0w, IhI s, csh lyng dlc (nd n0I nIcndcd
I0 bc uscd s dvdcnds) bccusc 0I lck 0I pr0IIblc nvcsImcnIs.
(k)
Ths 0ccurs, I mngcmcnI bclcvcs IhI I s chcpcr I0 chcvc
gr0wIh v mcrgcr.
(l)
Ths s dclbcrIc sIrIcgy I0 cqurc Ix l0sscs IhI my bc uscd s
Ix rclcI, wIh vcw I0 pyng l0wcr Ix.
All Ihc b0vc IcI0rs musI bc sscsscd n Ihc lghI 0I Ihc I0ll0wng Iw0 m|0r
lIcrnIvc cc0n0mc c0ndI0ns, I0 |usIIy mcrgcrs:
358
() Thc ddI0nl csh Il0ws dsc0unIcd I rIc IhI dcquIcly rcIlccIs
Ihc rsk 0I Ihcsc csh Il0ws, musI hvc p0sIvc ncI p0sIvc vluc 0r
(b) Thc rcducI0n n Ihc rsk lcvcl IIchng I0 Ihc bddng c0mpny
cxsIng csh Il0ws s such s I0 rcducc Is prcv0us rcqurcd rIc 0I
rcIurn.
g Plc runs n cxsIng busncss wh0sc ncI csh nIl0ws n Ihc ncxI sx ycrs
rc cxpccIcd I0 bc N2m pcr nnum. Thc lcvcl 0I rsk IIchcd I0 Ihcsc csh
Il0ws s sscsscd by nvcsI0rs n gcncrl I0 IIrcI 2 pcr ccnI pcr nnum.
Thc mrkcI's pcrccpI0n 0I Smll plc s such IhI I's rcqurcd rIc 0I rcIurn
s 3 pcr nnum. g plc plns I0 cqurc Ihc wh0lc 0rdnry shrc cpIl
0I Smll Plc. Thc c0mpny prcdcIs nnul ncI csh nIl0ws 0I Ihc cnlrgcd
c0mpny I0 bc N3m I0r cch 0I Ihc ncxI sx ycrs. Thc c0mpny's rcqurcd
rIc 0I rcIurn s cxpccIcd I0 Ill I0 0 pcr ccnI pcr nnum. Sh0uld g plc
cqurc Smll plc! !I Ihc nswcr s 'ycs' whI s Ihc mxmum prcc nd
mnmum prcc IhI sh0uld bc pd by g plc I0r Smll plc! !n rclIy, h0w
much wll bc pd.
Prcmcrgcr PrcscnI \luc 0I
g Plc's csh Il0ws = N2m x 4. = N8,222,000
Prcmcrgcr PrcscnI \luc 0I
Smll Plc's csh Il0ws = Nm x 3.998 = N3,998,000
P0sI Mcrgcr prcscnI vluc 0I
Enlrgcd g Plc csh Il0w = N3m x 4.355 =N3,0b5,000
Thc csh Il0ws 0I Ihc c0mpncs rc dsc0unIcd I 2, 3 nd 0 c0sIs 0I
cpIl rcspccIvcly usng Ihcr rclIcd nnuIy IcI0rs.
scd 0n Ihc b0vc clculI0ns, g plc sh0uld g0 hcd wIh Ihc mcrgcr.
AddI0nl csh Il0ws 0I N4,843,000 (N3,0b5,000 N8,222,000). Als0,
nvcsI0r's pcrccpI0n 0I Ihc rsk 0I Ihc cnlrgcd g plc hs rcduccd s sh0wn
n Ihc rcduccd dsc0unI rIc 0I 0 pcr nnum IIcr Ihc mcrgcr.
Thc mxmum prcc g plc sh0uld py I0r Smll plc s N4,843,000. Thc
mnmum prcc s N3,998,000. Ths s Ihc prcc bcl0w whch Ihc shrch0ldcrs
0I Smll plc wll n0I g0. Thc cIul prcc wll bc ncg0IIcd bcIwccn
N3,998,000 nd N4,843,000.
359
() PrI 0I Ihc N4,843,000 c0uld bc Irccd I0 cnlrgcd g Plc's csh Il0ws
bcng dsc0unIcd I l0wcr c0sI 0I cpIl bccusc 0I l0wcr rsk
pcrccpI0n 0I Ihc cnlrgcd c0mpny.
(b) !I s p0ssblc IhI Ihc N4,843,000 surpsscs Ihc cIul currcnI mrkcI
vluc 0I Smll plc I0r Ihc I0ll0wng rcs0ns:
() Thc Smll plc cxpccIcd csh Il0ws mghI bc lcss Ihn Nm, Ihc
cnlrgcd c0mpny mghI bc blc I0 pr0ducc m0rc cxpccIcd
csh Il0ws Ihn Ihc sum 0I Ihc cxpccIcd csh Il0ws 0I Ihc
ndvdul c0mpncs.
() Thc rsk IIchng I0 Ihc cnlrgcd c0mpny mghI bc lcss Ihn
Ihc 0vcrll rsk lcvcl 0I Ihc scprIc prIs.
Thcrc rc Ihrcc mn Iypcs 0I mcrgcr, Ihcsc rc:
()
Ths nv0lvcs c0mbnI0n 0I Iw0 c0mpncs cnggcd n smlr
cIvIcs. Ths Iypc 0I mcrgcr usully rcsulIs n rcm0vl 0I duplcIc
IclIcs nd Illng 0I Ihc supply gp I0 mccI ncrcscd dcmnd I0r
Ihc c0mpncs' pr0ducIs.
(b)
Ths 0ccurs whcrc bddng c0mpny dccdcs I0 nIcgrIc I0rwrd I0
Ikc dvnIgc 0I Ihc slcs 0uIlcI 0I Ihc IrgcI c0mpny 0r nIcgrIc
bckwrd I0 hvc cccss I0 Ihc s0urcc 0I rw mIcrls 0I Ihc IrgcI
c0mpny.
(c)
Ths s c0mbnI0n 0I Iw0 c0mpncs IhI rc I0Illy dIIcrcnI n
cIvIcs. Ths Iypc 0I mcrgcr s n0rmlly undcrIkcn I0r dvcrsIcI0n
purp0scs.
An mp0rInI prclmnry cxcrcsc I0 ny mcrgcr 0r Ikc0vcr s Ihc vluI0n
0I Ihc c0mpny I0 bc cqurcd. Thc vluI0n 0I c0mpny s dIIcrcnI Ir0m
Ihc vluI0n 0I snglc shrc n IhI n ddI0n I0 Ihc purchsc 0I IuIurc
csh Il0ws, Ihc buycr s ls0 n p0sI0n I0 c0nIr0l Ihc lcvcl 0I Ihcsc csh
Il0ws. Thc bss 0I vluI0n cn bc csh Il0ws, crnngs 0r sscIs 0r s0mc
mxIurc 0I Ihc Ihrcc. \luI0n s n cxcrcsc IhI w0uld n0I gvc prccsc
0uIc0mc. wIhn Ihc b0vc Ihrcc bscs Ihcrc rc numbcr 0I rcc0gnscd
3b0
mcIh0ds ll 0I whch cn rcsulI n dIIcrcnI 0uIc0mcs. Thc Inl prcc I0 bc
puI 0n c0mpny wll dcpcnd 0n Ihc ncg0II0ns nd sIuIc brgnng by
b0Ih prIcs. Thc mcIh0ds n Ihcmsclvcs cn 0nly gvc Ihc prmcIcrs
(mnmum nd mxmum prcc) wIhn whch ncg0II0ns cn Ikc plcc.
2b.7.
Thc I0ll0wng mcIh0ds rc usully rcc0gnscd:
()
Ths s Ihc dsc0unIcd csh Il0w (0CF) Icchnqucs. Hcrc Ihc
buycr s buyng Ihc dIIcrcncc n prcscnI vluc Icrms, bcIwccn
Ihc p0sI mcrgcr c0mbncd csImIcd csh Il0ws nd Is 0wn
prcmcrgcr csImIcd csh Il0ws.
(b)
whcrc Ihc c0mpny s qu0Icd, Ihc bddcr w0uld py prcc
IhI h0vcrs r0und Is mrkcI vluc. whcrc chngcs rc
cxpccIcd n IuIurc, whch I s bclcvcd w0uld grcIly IIccI
Ihc IuIurc csh Il0ws 0r Inncl plns 0I Ihc c0mpny, Ihcn
Ihc buycr sh0uld bc prcprcd I0 py prcmum b0vc Ihc
mrkcI vluc 0I Ihc c0mpny.
(c)
Thcrc rc Iw0 mcIh0ds IhI usc Ihc crnngs ppr0ch Ihc
ycld nd Ihc prcccrnng rI0.
()
Ths mcIh0d cpIlscs Ihc mnInblc crnngs
(usng Ihc m0sI rcccnI crnngs) 0I Ihc c0mpny I
prcdcIcrmncd rIc 0I rcIurn (ycld) whch nvcsI0rs
w0uld cxpccI Ir0m n nvcsImcnI smlr I0 Ihc 0nc
undcr c0nsdcrI0n (!nvcsI0rs 0pp0rIunIy c0sI 0I
cpIl). Thc sIcps nv0lvcd rc:
+ Exmnc s0mc psI pcr0ds' crnngs,
+ EsImIc Ihc mnInblc crnngs IIcr mkng
ppr0prIc d|usImcnIs I0 Ihc m0sI rcccnI crnngs,
+ 0cIcrmnc n grccd cxpccIcd rIc 0I rcIurn 0n Iunds
IhI c0uld bc puI n Ihc ncxI bcsI lIcrnIvc
nvcsImcnI (nvcsI0rs 0pp0rIunIy c0sI 0I cpIl),
+ CpIlsc Ihc mnInblc pr0IIs I Ihc rIc
csIblshcd b0vc.
3b
Assumc c0mpny's mnInblc pr0IIs IIcr Ix Igurc s N.25m nd Ihc
cxpccIcd rIc 0I rcIurn n such c0mpncs s b, Ihcn p0ssblc purchsc
prcc w0uld bc rrvcd I s I0ll0ws: N,250,000/0.b whch s cqul I0
N7,82,500.
Ths s n csy mcIh0d 0I vluI0n. H0wcvcr Ihc pr0blcm s IhI psI crnngs
rc uscd n csIblshng Ihc vcrgc mnInblc crnngs. AlIh0ugh Ihc
csImIcs (bscd 0n cIul psI dI) c0uld bc uscIul n r0und Iblc
ncg0II0n, I s d0ubIIul I Ihcy c0uld hclp n rrvng I ccurIc
mnInblc IuIurc pr0IIs.
()
Ths ppr0ch s vcry mp0rInI nd Ihc m0sI c0mm0n ppr0ch I0
csIblshng Ihc vluc 0I prIculr mcrgcr. !I s p0pulr sI0ck
mrkcI rI0, hcncc, I s wcll suIcd I0r csIblshng Ihc vluc 0I
c0mpny Ihc Iundng 0I whch c0mcs Ir0m Ihc cpIl mrkcIs.
Fnncng s n nIcgrl prI 0I nvcsImcnI whcIhcr 0rgnc (nIcrnl)
0r n0rgnc (cxIcrnl v M & A). Thc prcc crnngs rI0 s usully
Ikcn s Ihc mulIplc 0I crnngs 0I c0mpny whch nvcsI0rs rc
prcprcd I0 py (sI0ck mrkcI P/E rI0) Ikng cc0unI IuIurc crnngs
nd gr0wIh p0IcnIls. !I s n0rmlly cxprcsscd s: prcc pcr shrc
dvdcd by crnngs pcr shrc. ThI s,
EPS
M\
(d)
Ths ppr0ch s vcwcd s lIcrnIvc I0 crnngs mcIh0d, hcrc Ihc
bddcr s buyng scI 0I sscIs nd n0I IuIurc crnngs. Thc bddcr
w0uld nccd I0 cIIccnIly mngc Ihc sscIs n 0rdcr I0 chcvc IuIurc
crnngs. Thc mp0rIncc 0I c0nInuIy 0I mngcmcnI s w0rIh n0Ing
hcrc. Thc ssumpI0n n Ihc crnngs ppr0ch s IhI Ihc 0ld mngcrs
wll rcmn I0 c0nInuc I0 mnIn Ihc prcscnI lcvcl 0I crnngs. !I
Ihcy wll n0I sIy IIcr Ihc mcrgcr, I s cxpccIcd IhI n0Ihcr ppr0ch
sh0uld bc c0nsdcrcd, hcncc Ihc sscIs vluc ppr0ch.
Y0u rc Ihc Inncc mngcr 0I Abbcy Plc whch hs |usI rcp0rIcd rcs0nblc
pr0IIs, vlblc I0 Ihc 0rdnry shrch0ldcrs I0 Ihc Iunc 0I N.25m. Thc
c0mpny hs dcclrcd dvdcnd 0I 5 K0b0 pcr 0rdnry shrc 0I N.00.
Thc c0mpny s prcscnIly Icng lqudIy pr0blcms, cvcn wIh Ihc g00d pr0IIs
whch mnIn Ihc prcv0us pIIcrn 0I 0vcrll gr0wIh, buI wIh cyclcl
swngs.
3b2
Abbcy Plc hs g0IIcn pr0p0sl Ir0m 10c Plc suggcsIng IhI Ihc Iw0
c0mpncs sh0uld mcrgc. 10c Plc s rclIvcly ncw c0mpny (nc0rp0rIcd
Ivc ycrs g0) whch hs chcvcd InIsIc buI sIblc gr0wIh n pr0IIs
nd wh0sc pr0ducIs scrvc s rw mIcrls I0r Ihc 0pcrI0ns 0I Abbcy Plc.
Thc m0sI rcccnI pr0IIs 0I 10c Plc wcrc .875m. IIcr Ix nd nIcrcsI wIh
n 0rdnry dvdcnd 0I 0k0b0 pcr shrc. Thc rI0nl undcrlyng Ihc
mcrgcr pr0p0sl, cc0rdng I0 10c Plc, s IhI Ihcr c0mpny hs ls0 bccn
hvng lqudIy pr0blcms nd IhI by mcrgng b0Ih 0I Ihcm c0uld s0lvc
Ihcsc c0mm0n pr0blcms. 10c's nIl pr0p0sl dd n0I gvc dcIls buI |usI
suggcsIs IhI IcIsIndng dscuss0ns sh0uld bc sIrIcd nd IhI I0 mkc
Ihcsc dscuss0ns c0nscqucnIl Ihcy sh0uld ssumc IhI Ihc pr0IIs 0I cch
0I Ihc Iw0 c0mpncs wll ncrcsc by 0 pcrccnI ncxI ycr nd IhI I0r Ihc
purp0sc 0I Ihs mcrgcr, Ihc prcc crnngs rI0 w0uld bc 0 I0r Abbcy Plc
nd 5 I0r 10c Plc. Thc I0p mngcmcnI hs summ0ncd mccIng I0 dscuss
Ihc ssuc nd hs drccIcd y0u I0 nlysc Ihc mplcI0ns 0I Ihc suggcsI0n
0I 10c Plc nd I0 Icmsc Ihc Inncl IcI0rs whch y0u w0uld c0nsdcr s
rcgrds Ihs nlyss.
An cxIrcI 0I Ihc m0sI rcccnI blncc shccIs 0I 10c Plc nd Abbcy Plc rc
sh0wn bcl0w.
lncc ShccIs cxIrcI s I 3sI 0cccmbcr, 2008
10c Plc Abbcy Plc
N'000 N'000
NcI sscIs 5,000 2,500
Shrc CpIl
0rdnry shrcs 0I N cch 3,750 2,000
0 PrcIcrcncc shrcs 500
Rcscrvcs 7,500 0,000
2 0cbcnIurc sI0ck 3,750
5,000 2,500
Ernng Pcr shrc:
10c Plc =
Abbcy Plc =
P/E rI0 10c Plc = 5
3b3
Abbcy Plc = 0
MrkcI Prcc 10c Plc = 7.50 (.c. 0.50 x 5)
Abbcy Plc = b.25(.c. 0.b25 x 0)
MrkcI \luc 10c Plc = 28,25,000 ( 7.50 x 3,750,000)
Abbcy Plc = 2,500,000 ( b.25 x2,000,000)
\luI0n s n0I n cxcI cxcrcsc, s0 Ihc mplcI0ns 0I Ihc suggcsI0ns 0I
10c Plc wll bc nlyscd l0ng Ihc I0ll0wng lncs.
() Thc vluc 0I Abbcy Plc v Ihc crnngs (P/E rI0) nIcrcsIngly c0ncdc
wIh Is ncI sscIs vluc: 2.5m s gnsI 2m d|usIcd ncI sscIs.
0n Ihc 0Ihcr hnd Ihcrc s wdc gp bcIwccn Ihc vluc 0I 10c Plc
(v P/E rI0): 28.25m nd Is d|usIcd ncI sscIs 0I .250m.
Thc crnngs vluI0n s cxcIly 2.5 Imcs Ihc sscIs vluI0n.
(b) Thc rclIvc bg dIIcrcncc n Ihc b0vc vluI0n c0uld 0nly bc
cxplncd I I cn bc pr0vcd IhI Ihc crnngs gr0wIh pr0spccIs 0I 10c
Plc rc much bcIIcr Ihn Ih0sc 0I Abbcy Plc. AlIcrnIvcly 10c Plc sh0uld
c0nvncc Abbcy Plc IhI Is sscIs (10c Plc's) rc subsInIlly w0rIh
m0rc Ihn whI Ihc b00k vlucs p0rIcnd.
(c) Thc nI0rmI0n gvcn sys IhI 10c Plc hs InIsIc psI gr0wIh
rcc0rd 0I pr0IIs 0vcr Ihc lsI Ivc ycrs. Ths s hsI0rcl. PrcscnI vlucs
rclIc I0 Ihc IuIurc nd n0I Ihc psI.
(d) 10c Plc suggcsIcd P/E rI0 0I 5 I0r IsclI nd 0 I0r Abbcy Plc. Thcsc
Igurcs mghI hvc bccn crr0nc0usly bscd 0n psI gr0wIh pcrI0rmncc
s Ihc nI0rmI0n gvcs IuIurc gr0wIh p0IcnIl 0I 0 I0r b0Ih
c0mpncs. Unlcss I cn pr0vcd IhI Ihc dIIcrcnIl n psI gr0wIh
pIIcrns wll c0nInucs nI0 Ihc IuIurc, Abbcy Plc hs rclIvcly bccn
unduly pcnlscd wIh rcspccI I0 P/E rI0.
(c) Abbcy Plc sh0uld mmcdIcly sIrI ncg0IIng wIh Ihc drccI0rs 0I
10c Plc I0r p0ssblc mpr0vcmcnI n Ihc Icrms 0I Ihc mcrgcr.
(I) 0nc p0nI whch cn mmcdIcly bc rscd s Ihc IcI IhI Ihcr
c0mpny hs l0wcr lcvcl 0I Inncl lcvcrgc nd I Ihcy hvc I0
b0rr0w n Ihc mmcdIc IuIurc I0 s0lvc Ihcr lqudIy pr0blcms I s
Ihcr sscIs IhI wll bc uscd s c0llIcrl I0r m0rc l0n cpIl.
(g) Abbcy Plc sh0uld mkc c0unIcr pr0p0sl. !I c0uld ncg0IIc I0r bcIIcr
Icrms Ihn Ih0sc pr0p0scd by 10c Plc, whch rc rclly prclmnry
0IIcr, n nIl skng prcc whch ppcrs I0 Iv0ur 10c Plc .
(h) Thc nIl vluI0n plccd 0n Ihc Iw0 c0mpncs (v Ihc P/E rI0s)
3b4
whch s 28.25m nd 2.5m suggcsIs, r0ughly, rI0 0I 70 I0
30. Ths wll scrvc s Ihc bss 0I Ihcr rclIvc shrch0ldngs n Ihc
cnlrgcd c0mpny.
() Abbcy Plc mghI bsc Is c0unIcr pr0p0sl 0n sscIs vlucs, IhI s
Ihc rcspccIvc c0nIrbuI0n 0I cch c0mpny I0 Ihc sscIs 0I Ihc ncw
cnlrgcd c0mpny. Thcrc my sIll bc rcvluI0n 0I Ihc sscIs, buI
bscd 0n Ihc d|usIcd ncI sscIs vlucs s Ihcy rc n0w, Ihc nIcrcsIs
n Ihc ncw c0mpny sh0uld r0ughly bc n Ihc ncghb0rh00d 0I 50:50
(.c. 2.5m s gnsI .25m)
(|) AlIh0ugh 10c Plc my n0I cccpI Ihs ncw rrngcmcnI, Abbcy Plc
sh0uld bc quck n Icllng 10c Plc IhI I (10c Plc) n0w hs lqudIy
pr0blcms dcspIc Is psI gr0wIh rcc0rd.
(k) 0bv0usly, Ihcrc s wdc gp bcIwccn Ihc Iw0 pr0p0sls (70:30 vcrsus
50:50). Thcrc s l0I 0I r00m I0r ncg0II0n. A c0mprscd p0sI0n
mghI bc b0:40 n Iv0ur 0I 10c Plc, wIh 10c Plc Ikng 0vcr Abbcy Plc
nd ssung Is shrcs n cxchngc I0r Is sscIs. As mIIcr 0I IcI,
bscd 0n Ihc m0sI rcccnI crnngs, Ihc crnngs c0nIrbuI0n I0 Ihc
ncw cnlrgcd c0mpny s n Ihc rI0 0I b0:40 I0r 10c Plc nd Abbcy
Plc rcspccIvcly.
(l) Thc nlyss 0I Ihc crnngs pcr shrc bcI0rc nd IIcr Ihc mcrgcr I0r
Ihc Iw0 gr0ups 0I shrch0ldcrs 0n Ihc bss 0I b0:40 wll bc crrcd
0uI s I0ll0ws:
() AI prcscnI, 10c Plc hs 3,750,000 0rdnry shrcs nd Abbcy
Plc hs 2,000,000 0rdnry shrcs. scd 0n b0:40 rI0 nd
ssumng Abbcy Plc s mcrgng nI0 10c Plc, 10c Plc nccds I0
ssuc 2,500,000 0rdnry shrcs 0I Is 0wn I0 Ihc shrch0ldcrs
0I Abbcy Plc. Thc cnlrgcd 10c Plc wll n0w hvc b,250,000
0rdnry shrcs.
() Thc c0mbncd crnngs I0r Ihc cnlrgcd 10c Plc, ll0wng I0r
0 gr0wIh wll bc 3,437,500 |( ,250,000 + ,875,000) x
.0|. Thc p0sImcrgcr crnngs pcr shrc wll bc 0.55 IhI
s
+ Thc shrch0ldcrs 0I 10c Plc w0uld bc unIIccIcd by Ihc
mcrgcr, bscd 0n crnngs pcr shrc. (EPS bcI0rc Ihc mcrgcr
s 0.50 pcr shrc nd ll0wng I0r 0 gr0wIh, I wll bc
0.55 pcr shrc).
3b5
+ Thc shrch0ldcrs 0I Abbcy Plc w0uld rcccvc 2,500,000
0rdnry shrcs. Ths mcns I0r cvcry 4 0I Ihcr 0ld shrcs,
Ihcy w0uld rcccvc 5 ncw shrcs n 10c Plc. Thcr 4 0ld shrcs,
w0uld crn 2.75 (.c. 4 x 0.b25 x .0). AIIcr Ihc mcrgcr,,
Ihcr 5 shrcs w0uld crn 2.75 (.c. 5 x 0.55). Thcrc s
ls0 n0 chngc n Ihcr p0sI0n, bscd 0n b0:40 shrng rI0.
(m) Thc Iw0 c0mpncs w0uld hvc I0 sIuIcly ncg0IIc I0 scc whch
c0mpny wll bc blc I0 mpr0vc Is p0sI0n I Ihc c0sI 0I Ihc 0Ihcr.
(n) Thc Inncl IcI0rs IhI w0uld bc c0nsdcrcd n Ihc Inl ncg0II0n
ncludc:
() 0cIls 0I 10c Plc prcv0us ycrs gr0wIh,
() Thc pr0bblIy IhI cch c0mpny wll crn 0 pr0IIs gr0wIh,
() Thc lqudIy p0sI0n 0I 10c Plc,
(v) Thc lkclh00d 0I b0rr0wng IIcr Ihc mcrgcr,
(v) Thc cIIccI Ihc mcrgcr w0uld hvc 0n IuIurc pr0IIblIy 0I
cnlrgcd 10c Plc., nd
(v) Thc qulIy 0I Ihc Iw0 c0mpncs' sscIs.
Thc b0vc llusIrI0n cxcmplIcs Iypcl vluI0n pr0blcm whch
usully dsplys Ihc I0ll0wng chrcIcrsIcs:
() Lck 0I cxcIIudc,
(b) Thc usc 0I Iw0 m|0r ppr0chcs crnngs ppr0ch nd sscIs
ppr0ch,
(c) 0cIcrmnI0n 0I mnmum nd mxmum prccs, nd
(d) 0cIcrmnI0n 0I Inl prcc, 0nly, Ihr0ugh ncg0II0ns.
s 0nc whcrc Ihc cqurng c0mpny s buyng Ihc
IrgcI c0mpny n 0rdcr I0 chcvc Is sIrIcgc 0b|ccIvcs. A c0mpny my
wnI gurnIccd supply 0I crIcl rw mIcrl whch s n sh0rI supply
nd IhcrcI0rc cqurc Ihc supplyng c0mpny. Thc wh0lc 0b|ccIvc s I0 svc
c0sIs.
!s 0nc IhI hs Ihc 0b|ccIvc 0I buyng c0llccI0n
0I sscIs, dsp0sng s0mc 0I Ihcsc sscIs, rcducng c0sIs nd runnng whI s
lcII 0I Ihc busncss s cIIccnIly s p0ssblc. Hcrc, Ihc c0mpny s run 0n
sIndl0nc bss nd n0I prI 0I Ihc 0vcrll sIrIcgy 0I Ihc busncss.
3bb
2b.8.
Ths nv0lvcs shrcI0rshrc cxchngc s gnsI pyng csh s
c0nsdcrI0n. Hcrc, "rI0 0I cxchngc" whch rcIlccIs Ihc rclIvc
mp0rIncc 0I Ihc Iw0 c0mpncs wIh rcspccI I0 s0mc vrblcs musI
bc dcIcrmncd. Tw0 such vrblcs IhI wll bc cxplncd hcrc rc:
() Ernngs pcr shrc
(b) MrkcI vluc pcr shrc
Hcrc Ihc mpcI 0I ny cqusI0n 0n Ihc crnngs pcr shrc (E.P.S.)
0I Ihc cnlrgcd c0mpny s cxmncd.
C0mpny X Plc s plnnng I0 buy c0mpny Y Plc. Thc Inncl
nI0rmI0n 0n Ihc pr0p0scd purchsc s sh0wn bcl0w:
X Plc Y Plc
CurrcnI crnngs 0,000,000 4,500,000
Numbcr 0I shrcs n ssuc 2,000,000 ,500,000
Ernng Pcr shrc 5.00 3.00
Prcc pcr shrc 40.00 5.00
Prcc crnng rI0 8 5
C0mpny Y Plc hs cccpIcd Ihc 0IIcr 0I 20.00 pcr shrc, I0 bc
rcccvcd n shrcs 0I c0mpny X Plc.
0cIcrmnc Ihc Inncl cIIccI 0I Ihs cqusI0n 0n Ihc shrch0ldcrs
0I b0Ih c0mpny X Plc nd c0mpny Y Plc rcgrdng Ihcr crnngs
pcr shrc.
Thc cxchngc rI0 s 20/40 whch s 0nc shrc 0I c0mpny X I0r
cvcry 2 shrcs 0I c0mpny Y. 0r 0.5 0I X I0r 0I Y.
T0Il numbcr 0I 0rdnry shrcs 0I c0mpny X I0 bc ssucd I0
shrch0ldcrs 0I c0mpny Y = 750,000
C0mbncd p0sI cqusI0n numbcr 0I shrcs = 2,750,000
C0mbncd p0sI cqusI0n crnngs = 4,500,000 ssumng n0
chngc n lcvcl 0I crnngs 0I b0Ih c0mpncs.
3b7
Ernng pcr shrc 0I cnlrgcd c0mpny X Plc = 5.27
Thc mcrgcr mpr0vcs Ihc EPS 0I c0mpny X Ir0m 5 I0 5.27. H0wcvcr
0ld c0mpny Y's shrch0ldcrs suIIcr dr0p n Ihcr EPS Ir0m 3 I0
2.b4 IhI s 5.27/2.
N0Ic IhI I0r cch shrc 0I 0ld c0mpny Y, shrch0ldcr h0lds 0I
ncw c0mpny X's shrc.
A vcry mp0rInI p0nI I0 n0Ic s IhI s l0ng s Ihc prcc crnng (P/E
rI0 rcccvcd by Ihc IrgcI c0mpny shrch0ldcrs s grcIcr Ihn Ihc
P/E rI0 0I Ihc bddng c0mpny, Ihcrc wll bc dluI0n n EPS 0I Ihc
bddng c0mpny's shrc. Assumc, I0r llusIrI0n, IhI Ihc grccd 0IIcr
prcc s 27. Thc P/E rI0 0I c0mpny Y wll n0w bc 9, IhI s, 27/3
s gnsI Ihc 0rgnl P/E rI0 0I b.b7 ( 20/3).
Thc rI0 0I cxchngc s 27/ 40 whch IrnslIcs I0 0.b75 0I cvcry
shrc 0I c0mpny X I0r ! shrc 0I c0mpny Y. Ihc numbcr 0I c0mpny
X shrcs I0 bc ssucd wll n0w bc ,05,500. T0Il numbcr 0I shrcs
I0r Ihc p0sImcrgcr cnlrgcd c0mpny X wll bc 3,05,500 nd Is
p0sI mcrgcr EPS wll bc 4.8 IhI s ( 4,500,000/3,05,500).
C0mpny Y hd P/E rI0 0I b.b7 (.c. 20/N3) nd P/E rI0 0I 9
( 27/3). Thc mpcI 0I P/E rI0 0I b.b7 (lcss Ihn c0mpny X P/E rI0
0I 8) s I0 ncrcsc Ihc p0sImcrgcr EPS 0I c0mpny X shrc nd Ihc
mpcI 0I P/E rI0 0I 9 (grcIcr Ihn c0mpny X P/E rI0 0I 8) s I0
rcducc Ihc p0sImcrgcr EPS 0I Ihc cnlrgcd c0mpny. Thus Ihc nIl
p0sImcrgcr EPS I0r Ihc cnlrgcd c0mpny cn ncrcsc 0r dccrcsc,
Ihc cxIcnI 0I whch wll dcpcnd 0n:
() Thc rclIvc m0unI 0I Ihcr prcmcrgcr crnngs, nd
(b) Thc pr0p0rI0n 0I Ihcr prcmcrgcr P/E rI0s.
!I sh0uld bc n0Icd IhI Ihc p0ssblc nIl dluI0n n crnngs pcr
shrc c0uld bc clmnIcd I crnngs rc cxpccIcd I0 gr0w. H0w s00n
Ihs clmnI0n wll 0ccur wll dcpcnd 0n Ihc rIc 0I IuIurc gr0wIh
rIc n crnngs. Thc l0ngcr I Ikcs I0 clmnIc dluI0n, Ihc lcss
IIrcIvc s n cqusI0n.
3b8
Thc mn c0nccrn hcrc s Ihc rI0 0I cxchngc bscd 0n mrkcI prcc.
Ths s dcIcrmncd s I0ll0ws:
MrkcI prcc 0I x Numbcr 0I shrcs 0IIcrcd
Ihc bddng c0mpny's shrc I0 Ihc IrgcI c0mpny's
shrch0ldcr pcr 0nc shrc 0I
Ihcr c0mpny.
Assumng n Ihc csc 0I c0mpny X nd c0mpny Y, n llusIrI0n
2b.4 c0mpny X 0IIcr IhrcccghIs 0I Is shrc I0 cch 0I Ihc
shrch0ldcrs 0I c0mpny Y. Ihcn Ihc rI0 0I cxchngc
=
Thc 0rdnry shrcs 0I Ihc Iw0 c0mpncs wll cxchngc I0r I0 ,
bscd 0n mrkcI prcc. !I Ihcrc s rclIvc sIblIy n Ihc mrkcI prcc
0I Ihc cnlrgcd c0mpny I 40, Ihc p0sI0n 0I Ihc shrch0ldcrs 0I
b0Ih c0mpncs rc n0I bcIIcr Ihn Ihcr prcmcrgcr p0sI0ns wIh
rcspccI I0 mrkcI vluc. Thc bddng c0mpny musI 0IIcr prcc hghcr
Ihn Ihc currcnI mrkcI prcc, I0r Ihc IrgcI c0mpny's shrch0ldcrs
I0 bc nduccd by I0r cxchngc. Pr0bbly Ihc bddng c0mpny
w0uld 0IIcr 0.40 0I Ihc vluc 0I Is shrc .c. b shrc.
A c0mpny s n0I cxpccIcd I0 py hghcr mrkcI prcc whcrc Ihcrc s n0
cxpccII0n 0I syncrgy, bcIIcr mngcmcnI 0r cxsIcncc 0I undcr prcng.
H0wcvcr, whcrc Ihc bddng c0mpny hs hghcr P/E rI0 nd Ihs Igurc
s cxpccIcd I0 bc mnIncd IIcr Ihc mcrgcr Ihc c0mpny's shrch0ldcrs
c0uld sIll bc bcIIcr 0II, cvcn whcn hghcr prcc s pd.
Assumng Ihc smc nI0rmI0n n llusIrI0n 2b4 0n Ihc mcrgcr 0I c0mpny
X Plc nd c0mpny Y Plc cxccpI IhI c0mpny X s n0w 0IIcrng 0.40 0I Is
shrc I0r cch shrc 0I c0mpny Y. 0r Nb (IhI s 0.40 X 40).
Thc cxchngc rI0 s
3b9
Shrc 0I Y Plc rc bcng 0IIcrcd Nb I0r cch shrc 0I X Plc Ihcy 0wn. Thcy n0
d0ubI gn Ir0m Ihc cqusI0n bscd 0n mrkcI prcc bccusc Ihcr shrc
ws I0rmcrly prccd I 5.
Thc numbcr 0I shrcs IhI X Plc wll n0w ssuc = 800,000 (0.40 x 2,000,000).
Thc p0sI mcrgcr sIuI0n wll bc s I0ll0ws:
Thc Enlrgcd X Plc
T0Il Ernngs 4.500,000
Numbcr 0I shrcs n ssuc 2,800,000
Ernng pcr shrc 5.8
Prcc crnng rI0 8
MrkcI prcc 4.44
Thc shrch0ldcrs 0I b0Ih c0mpncs hvc gncd Ir0m Ihc cqusI0n. Thc
rcs0n s Ihc dIIcrcncc n Ihc Iw0 c0mpncs prcc crnng rI0s.
!I Ihc mrkcI s I00lcd by Ihs rIIcl gr0wIh I mcns c0mpny cn
pprcnIly c0nInuc I0 crcIc vluc I0r Is shrch0ldcrs v 0nly cqusI0ns
0I c0mpncs wIh l0wcr prcc crnng's rI0s.
H0wcvcr, I Ihc cpIl mrkcI rc cIIccnI I mghI n0I bc p0ssblc I0r
c0mpny IhI cnn0I cxhbI rcl gr0wIh p0IcnIl I0 mnIn Ihc smc lcvcl
0I prcccrnng rI0.
!n n cIIccnI mrkcI wIh n0 cxpccII0ns 0I syncrgy Ihc cxpccIcd p0sI
mcrgcr P/E rI0 w0uld s0mch0w ncr Ihc wcghIcd vcrgc 0I Ihc Iw0
c0mpncs prcmcrgcr P/E rI0s. !n Ihs csc, Ihc bddng c0mpny w0uld
n0I bc blc I0 ncrcsc shrch0ldcrs wclIh Ihr0ugh mcrc cqusI0n 0I
c0mpncs wIh l0wcr P/E rI0s.
Thc I0ll0wng mcIh0ds rc Ihc 0ncs n0rmlly uscd by Ihc cqurng c0mpny.
Thc mcIh0d ch0scn musI bc IIrcIvc I0 Ihc IrgcI c0mpny's shrch0ldcrs
nd bc cccpIblc I0 Ihc cqurng c0mpny.
()
Thc IIrcI0n 0I csh s IhI I cn bc uscd wIh0uI ncurrng ny c0sI.
H0wcvcr Is rcccpI my IIrcI mmcdIc cpIl gns Ix. Fr0m
Ihc cqurng c0mpny's sIndp0nI, lqudIy my bc l0w nd csh s
rscd by publc ssuc 0I sccurIcs 0r by b0rr0wng I rclIvcly
grcI c0sI.
370
(b)
0rdnry shrcs my bc IIrcIvc I Ihcy rc sIll nIcrcsIcd n cquIy
nvcsImcnIs. H0wcvcr, dsp0sl my crcIc pr0blcm I0r Ih0sc wh0
rc n0I kccn n h0ldng shrcs ny m0rc. Fr0m Ihc cqurng c0mpny's
p0nI 0I vcw, csh my bc rscd n Ihc cpIl mrkcIs 0r b0rr0wcd
n 0rdcr I0 py I0r Ihc cqusI0n. N0IwIhsIndng, ssuc 0I shrcs
hs n 0pp0rIunIy c0sI I0r Ihc shrch0ldcrs 0I Ihc bddng c0mpny
s Ihc shrcs c0uld wcll hvc bccn ssucd I0r csh.
(c)
Fr0m Ihc vcw p0nI 0I Ihc bddcr, l0n sI0cks w0uld n0I dluIc c0nIr0l
s lcndcrs d0n'I usully hvc v0Ing rghIs. Fr0m Ihc vcwp0nI 0I
shrch0ldcrs 0I Ihc IrgcI c0mpny, Ihcy w0uld bc cnIIlcd I0 Ixcd
nc0mc nd Ixcd cpIl rcpymcnIs, IhcrcI0rc, lcss rsk. Thc
dsdvnIgcs h0wcvcr rc IhI Ihc bddng c0mpny w0uld hvc
Ixcd c0mmImcnI s I0 nIcrcsI nd cpIl rcpymcnI dcIulI 0I
whch my lcd I0 lqudI0n nd Ihc shrch0ldcrs 0I Ihc IrgcI
c0mpny w0uld nccd I0 mkc c0mplcIc chngc n Ihcr nvcsImcnI
culIurc, hbIs nd IIIudcs I0wrds rsk nd rcIurn.
Thc dscuss0ns 0n mcrgcrs s0 Ir, hvc I0cuscd 0n rcs whch nv0lvc
ncg0II0ns bcIwccn mngcmcnIs nd drccI0rs 0I Ihc Iw0 c0mpncs. !n
s0mc cscs, s dcnIIcd bcl0w Ihs my n0I bc s0 nd Ihc mcrgcr my bc
'unIrcndly'.
()
Ths s Ihc cqusI0n 0I 0nc c0mpny (Ihc IrgcI) by n0Ihcr c0mpny
(Ihc bddcr) n such wy s I0 c0nsIIuIc n unIrcndly 0r h0sIlc
mcrgcr. Hcrc mny IIcmpIs I0 buy nI0 Ihc c0mpny rc rcvsIcd by
Ihc drccI0rs 0I Ihc IrgcI c0mpny I0r Ihc I0ll0wng rcs0ns:
() Thc prcc bcng 0IIcrcd mghI bc rcgrdcd s I00 l0w
(b) !I mghI bc Ih0ughI IhI Ihc wh0lc cIvIy hs n0 cc0n0mc bss.
(c) Pr0IccI0n 0I Ihcr sclI nIcrcsI.
(b)
H0sIlc Ikc0vcrs rc chrcIcrzcd by Ihc mkng 0I Icndcr 0IIcrs. A
Icndcr 0IIcr s n 0IIcr mdc by c0mpny I0 Ihc prcscnI shrch0ldcrs
0I n0Ihcr c0mpny I spccIcd prcc whch s usully hghcr Ihn
Ihc currcnI mrkcI prcc. Thc 0b|ccIvc s I0 cvcnIully 0bIn
c0nIr0llng nIcrcsI n Ihc IrgcI c0mpny. Thc 0IIcr s mdc drccIly
I0 Ihc shrch0ldcrs wh0 rc prcprcd I0 rclnqush Ihcr nIcrcsIs: Ihc
37
prcc s pprccbly hghcr IhI Ihc currcnI mrkcI prcc I0 cnc0urgc
shrch0ldcrs I0 surrcndcr Ihcr shrcs. A Icndcr 0IIcr ll0ws Ihc
cqurcr I0 sdclnc Ihc mngcmcnI 0I Ihc IrgcI c0mpny. Tcndcr
0IIcrs rc n0rmlly c0mmuncIcd I0 Ihc shrch0ldcrs cIhcr Ihr0ugh
publcI0n n Ihc Inncl ncwsppcrs 0r Ihr0ugh drccI mlngs I0
Ihcm. Thcrc s ls0 n cxsIcncc Ihc scc0ndIcr Icndcr 0IIcr. Hcrc Ihc
IrsIIcr w0uld bc I hghcr prcc nd wIh c0nsdcrI0n wh0lly n
csh. Thc scc0ndIcr, 0IIcrs I0 Ikc Ihc blncc I prcc l0wcr Ihn
Ihc IrsIIcr 0IIcr prcc nd c0nsdcrI0n n mx 0I csh nd
sccurIcs.
(c)
Thc IrgcI c0mpny, Ihr0ugh Is mngcmcnI, my usc Ihc I0ll0wng
dcIcnsvc IcIcs:
() mngcmcnI Ircs I0 c0nvncc
shrch0ldcrs I0 rc|ccI Ihc 0IIcr 0n Ihc gr0und 0I l0w prcc.
() pymcnI 0I csh dvdcnd
0r ssuc 0I shrc splI.
() I Imcs mngcmcnI Ikcs lcgl cI0n wIh
vcw I0 IrusIrIng Ihc bddcr
(v) MngcmcnI my scck 'whIc knghI' whcrc
cvcry 0Ihcr sIcp Ils. A whIc knghI s 'Ircndly' bddcr wh0
s skcd by Ihc IrgcI c0mpny I0 buy shrcs Ir0m Ihc h0sIlc
bddcr nd /0r lunch Ircndly c0unIcr bd wIh vcw I0
IrusIrIng Ihc h0sIlc bddcr.
2b..
Thcsc rc m0rc I0rml dcvccs IhI rc puI n plcc bcI0rc Ihc cIul
Ikc0vcr IIcmpI. Thcr 0b|ccIvc s I0 mkc n undcsrblc Ikc0vcr
m0rc dIIculI. Such dcvccs ncludc:
() 0rr0wng hcvly nd usng Ihc pr0cccds I0 py lrgc 0nc
0II csh dvdcnd I0 shrch0ldcrs. Ths cI0n, 0I c0ursc, mghI
IurIhcr b0rr0wng, p0ssbly I0r Inncng Ihc cqusI0n.
(b) 'P0s0nng' Ihc Ikc0vcr IIcmpI by dcvcc kn0wn s
. !I s uscd by Ihc IrgcI c0mpny I0 mkc IsclI lcss
IIrcIvc I0 Ihc p0IcnIl bddcr.
0nc wy 0I d0ng Ihs s I0r Ihc c0mpny I0 ssuc rghIs usully,
c0nvcrIblc prcIcrcncc shrcs I0 Is shrch0ldcrs.
372
Ths Iypc 0I ssuc mghI n0I bc 0I nIcrcsI I0 Ihc p0IcnIl bddcr
s Ihc ssuc w0uld c0nIn dsc0urgng Icrms. Thc 0b|ccIvc
0I Ihs cI0n s I0 c0mpcl Ihc p0IcnIl bddcr nI0 Ilkng
drccIly I0 Ihc b0rd 0I drccI0rs IIcr I mghI hvc cqurcd
suIIccnI numbcr 0I shrcs n Ihc IrgcI c0mpny.
(c) Sprcd Ihc Icrms 0I Ihc c0mpny's b0rd such IhI n0I mny
drccI0rs w0uld sInd I0r rcclccI0n cch ycr. Thus Ihcrc w0uld
bc nccd I0r m0rc v0Ics I0 bc blc I0 clccI mny drccI0rs IhI
Iv0ur Ikc0vcr.
(d) Mkng rcs0luI0ns I0r mcrgcr ppr0vls I0 rcqurc m0rc Ihn
smplc m|0rIy, sy Iw0 Ihrds m|0rIy.
(c) Rcqurng IhI 'Ir prcc' whch s Ixcd n dvncc bc pd
I0 mn0rIy shrch0ldcrs. whcrc 'Ir prcc' s n0I grccd, Ihc
c0mpny c0uld nssI IhI 0nly Iw0Ihrds 0r IhrccI0urIhs
m|0rIy musI ppr0vc Ihc prcc 0IIcrcd.
(I) Pr0vdng I0r 0nly sy Iw0Ihrds 0r IhrccI0urIhs m|0rIy I0r
ny mcndmcnIs (ncludng prcv0usly ppr0vcd nIIkc0vcr
pr0vs0ns) I0 Ihc ArIclcs 0I Ass0cI0n.
(g) EnIcrng nI0 hghly nv0lvng mngcmcnI c0nIrcIs wIh I0p
mngcrs whch c0uld cusc c0mmImcnIs I0 pymcnI 0I hgh
c0mpcnsI0n I Ihc c0mpny s Ikcn 0vcr
.
(h) EnIcrng nI0 n grccmcnI wIh n 0uIsdc gr0up IhI hs
subsInIl nIcrcsIs n Ihc c0mpny, n0I I0 ncrcsc Ihcr
shrch0ldng I0r pcr0d 0I mny ycrs. Ths s cllcd
() uyng bck Ihc shrcs hcld, by IhrcIcnng prIy I prcmum
0vcr Ihc mrkcI prcc. Ths 0IIcr whch s n0I cxIcndcd h0wcvcr
I0 0Ihcr shrch0ldcrs s kn0wn s Thc 0b|ccIvc
s I0 cnc0urgc Ihc prIy I0 bnd0n Ihc IhrcI.
2b..2
Tw0 rcs0ns hvc bccn dvnccd I0r puIIng brrcrs n Ihc wy 0I
c0rp0rIc c0nIr0l by pr0spccIvc bddcrs.
() T0 pr0IccI mngcmcnI |0bs, nd
(b) T0 pr0IccI shrch0ldcrs' nIcrcsIs.
373
whlc I c0uld bc sd IhI mngcmcnI c0uld bc wcll pr0IccIcd by
Ihcsc dcvccs, I s dcbIblc whcn Ihc nIcrcsIs 0I shrch0ldcrs c0uld
cIully bc pr0IccIcd. whlc mny 0I Ihcsc dcvccs mghI n0I
sgnIcnIly ncrcsc Ihc shrc prcc, Ihc 'grccnml' dcInIcly hs
Ihc cIIccI 0I rcducng Ihc shrch0ldcr's wclIh. Als0, sIndsIll
grccmcnI c0uld hvc ncgIvc cIIccIs 0n shrc prcc.
Thc succcss 0I ny mcrgcr cn bc sscsscd Ir0m Ihrcc pcrspccIvcs:
() Thc vcws 0I mngcrs 0I mcrgcd c0mpncs Ikcn Ir0m prcIcl
nIcrvcws wIh Ihcm,
(b) Thc szc 0I Ihc cc0unIng pr0IIs 0I Ihc mcrgcd c0mpncs c0mprcd
wIh Ihc pr0IIs bcI0rc Ihc mcrgcr, nd
(c) MrkcI vlucs 0I Ihc shrcs 0I Ihc mcrgcd c0mpncs bcI0rc nd IIcr
Ihc mcrgcr.
Evdcncc Ir0m Ihc mIurc cpIl mrkcIs I0r c0rp0rIc c0nIr0l n U.K nd
USA sh0wcd IhI mcrgcrs, cc0rdng I0 Ihc mngcrs n Ihc IrsI cIcg0ry,
dd n0I brng ny bcncIIs. Thc rcs0ns I0r Ilurc wcrc scrbcd I0
mngcmcnI's IIIudcs I0wrds p00r mngcmcnI prcIccs n Ihc IrgcI
c0mpny nd lck 0I kn0wlcdgc 0I Ihc bddcrs 0I Ihc IrgcI c0mpny nd Is
ndusIry m0ng 0Ihcrs. Evdcncc Ir0m Ihc scc0nd pcrspccIvc sh0wcd IhI
vcrgc pr0IIblIy IIcr Ihc mcrgcr ws sgnIcnIly l0wcr Ihn Ihc prc
mcrgcr pr0IIblIy. Evdcncc 0I mpcI 0n mrkcI vlucs sh0wcd IhI
shrch0ldcrs 0I Ihc IrgcI c0mpny rclscd g00d ncrcscs n wclIh
c0mprcd wIh Ihcr prcmcrgcr p0sI0n. Thc prcmum pd by Ihc bddcr
ws gvcn s Ihc rcs0n I0r Ihs. Thc mpcI 0n mrkcI vlucs 0I Ihc shrcs
0I Ihc shrch0ldcrs n Ihc cqurng c0mpny ws n0I clcr.
H0wcvcr, I0r ny mcrgcr 0r Ikc0vcr I0 bc |usIIcd, Ihc cxpccIcd syncrgy
nd / 0r mpr0vcd mngcmcnI musI rcsulI n n ncrcsc n shrch0ldcrs'
wclIh whch s n cxccss 0I Ihc prcmum pd I0r Ihc Ikc0vcr. !n Ngcr
Ihc mrkcI I0r c0rp0rIc c0nIr0l hs n0I bccn vcry cIvc. Thc 0nly mcrgcrs
IhI hI Ihc hcdlncs wcrc Ihc g0vcrnmcnI p0lcy drvcn bnk mcrgcrs 0I
2005. Thc 0nly vsblc cIIccI IhI ws sccn ws Ihc ncrcsc n Ihc cpIl
bsc 0I cch 0I Ihc Ihcn IwcnIyIvc bnks nd Ihcr blIy I0 wIhsInd Ihc
currcnI Inncl mclId0wn. My bc s0mc 0I Ihcm w0uld hvc g0nc undcr by
n0w, I Ihcy hd n0I mcrgcd.
TcsIs smlr I0 Ih0sc 0I Ihc mIurc mrkcIs cnn0I bc crrcd 0uI hcrc bccusc
n Ihc IrsI nsIncc Ihcsc mcrgcrs wcrc n0I vluc drvcn.
M0rc0vcr Ihcrc s dcrIh 0I nI0rmI0n n Ihc Ngcr CpIl MrkcIs I0r
c0rp0rIc c0nIr0l.
374
Mcrgcrs n Ngcr rc gudcd by Ihc pr0vs0ns 0I Ihc C0mpncs nd Allcd
MIIcrs AcI (CAMA 990 s mcndcd). Thc dcIls 0I ll Ihcsc lcgl pr0vs0ns
rc bcy0nd Ihc sc0pc 0I Ihs pck.
H0wcvcr, cc0rdng I0 Ihc AcI (CAMA) Ihc c0ndI0ns I0r schcmc 0I mcrgcrs
I0 bc cIIccIvc nd bndng ncludc Ihc I0ll0wng:
() Thc spccl rcs0luI0ns I0 bc pr0p0scd I Ihc c0urI 0rdcrcd mccIngs
musI bc duly psscd.
(b) SccurIcs nd Exchngc C0mmss0n (SEC) musI ppr0vc Ihc Icrms
nd c0ndI0ns 0I Ihc schcmc s grccd by Ihc m|0rIy 0I Ihc
shrch0ldcrs 0I b0Ih c0mpncs.
(c) Thc schcmc musI hvc bccn ppr0vcd by m|0rIy rcprcscnIng Ihrcc
I0urIhs n vluc 0I Ihc shrch0ldcrs 0I cch 0I Ihc Iw0 c0mpncs
v0Ing cIhcr n pcrs0n 0r by pr0xy, I Ihcr scprIc mccIngs c0nvcncd
by 0rdcr 0I Ihc c0urI.
(d) Thc c0urI musI sncI0n Ihc schcmc nd c0nIrm Ihc cnccllI0n 0I
Ihc IrgcI c0mpny, Ihc mcrgcr 0I Is sscIs nd lblIcs nd
undcrIkngs, wIh Ih0sc 0I Ihc bddng c0mpny s pr0vdcd n Ihc
schcmc, nd Ihc dss0luI0n 0I Ihc IrgcI c0mpny wIh0uI wndng
up.
(c) 0clvcry 0I Ihc 0IIcc c0py 0I Ihc C0urI 0rdcr I0 Ihc RcgsIrr 0cncrl
0I Ihc C0rp0rIc AIIrs C0mmss0n (CAC)
Thc qulIIvc IcI0rs n mcrgcrs nd cqusI0ns w0uld ncludc Ihc
I0ll0wng:
(a) Thcrc sh0uld bc c0nIrmI0n IhI Ihc c0mpncs c0mng
I0gcIhcr hvc n0 lcgl pr0blcms.
(b) Thcrc sh0uld bc p0IcnIl I0r pr0ducI mpr0vcmcnI 0r
supcr0rIy.
(c) : ddcrs mngcmcnI's lck 0I kn0wlcdgc 0I Ihc IrgcI
c0mpny 0r Is ndusIry my cusc mcrgcr I0 Il.
(d) MngcmcnIs cpblIcs sh0uld bc pr0pcrly cvluIcd.
(c) 0scuss0ns 0n Ihc culIurc 0I cch c0mpny sh0uld bc sIrIcd
s crly s p0ssblc. 0IIcrcnccs n culIurc hvc cuscd mcrgcrs I0
Il.
375
(I) MngcmcnI IIIudcs I0wrds Ihc mcrgcr cxcrcsc s wh0lc.
(g) Lck 0I pr0pcr p0sImcrgcr nIcgrI0n. Thcrc sh0uld bc n nIcgrI0n
pln.
Mcrgcrs nd cqusI0ns (M&A) rc wy 0I cxpndng nd gr0wng
busncss by purchsng n0Ihcr c0mpny n Is cnIrcIy. M&A hvc Ihc
0b|ccIvc 0I mxmsng shrch0ldcrs wclIh Ihr0ugh crcI0n 0I whI s
kn0wn s 'syncrgy'. Thc m0Ivcs I0r mcrgcrs rc mny nd Ihcy ncludc cccss
I0 s0urcc 0I supply, cccss I0 m0rc mrkcI 0pp0rIunIcs, rcducI0n n
c0mpcII0n, 0pcrIng cc0n0mcs, bcIIcr mngcmcnI, dvcrsIcI0n,
mrkcI sgnl, sIr0ng sscI bsc nd s0 0n. F0r ny mcrgcr I0 bc cc0n0mclly
|usIIcd, Ihc I0ll0wng IcI0rs musI cxsI:
() 0sc0unIcd ddI0nl csh Il0ws musI bc p0sIvc, nd
(b) Thcrc sh0uld bc rcducI0n n p0sI mcrgcr rsk lcvcl.
Thcrc rc Ihrcc mn Iypcs 0I mcrgcrs Ihc "h0rz0nIl", Ihc "vcrIcl" nd
"c0ngl0mcrIc" mcrgcrs.
A vcry mp0rInI sIrIng sIcp I0r ny M & A cIvIy s I0 vluc Ihc IrgcI
c0mpny. Thc Iw0 m|0r vluI0n ppr0chcs rc Ihc crnngs ppr0ch
nd Ihc sscIs ppr0ch.
Thcrc rc vrI0ns 0I Ihcsc Iw0 ppr0chcs. An0Ihcr vcry mp0rInI mcIh0d
0I vlung c0mpny s Ihc dsc0unIcd csh Il0w (0CF) mcIh0d. Ths mcIh0d
s n0I IrcqucnIly uscd bccusc 0I Is c0mplcxIcs n Icrms 0I csImIng IuIurc
csh Il0ws nd dcIcrmnng Ihc ppr0prIc dsc0unI rIc.
Thc vluI0n pr0ccss s n0I n cxcI cxcrcsc. Thc Inl vluc rrvcd I, s
usully IuncI0n 0I sIuIc ncg0II0n bcIwccn Ihc prIcs nv0lvcd.
An cqusI0n musI bc undcrIkcn s0 s I0 chcvc Ihc sIrIcgc 0b|ccIvc 0I
Ihc c0mpny. !n sIrIcgc cqusI0ns, Ihc c0nsdcrI0n s nvrbly Ihc
shrcs 0I Ihc cqurng c0mpny. A vcry crIcl IcI0r n usng Ihs I0rm 0I
c0nsdcrI0n s Ihc dcIcrmnI0n 0I Ihc "rI0 0I cxchngc". 0Ihcr I0rms 0I
c0nsdcrI0n rc csh nd l0n sI0cks.
Thcrc rc "Ircndly" s wcll s 'unIrcndly' 0r 'h0sIlc' mcrgcrs. Thc lIIcr rc
rcIcrrcd I0, Icchnclly, s Ikc0vcrs. H0sIlc Ikc0vcrs rc chrcIrscd by
dcIcnsvc IcIcs 0I IrgcI c0mpny mngcmcnI nd nIIkc0vcr dcvccs
whch musI hvc bccn dcsgncd cvcn bcI0rc Ihc nn0unccmcnI 0I Ihc Ikc
0vcr cIvIy. 0cIcnsvc IcIcs ncludc mngcmcnI ppcl I0 Ihc
37b
shrch0ldcrs, lrgc 0nc0II csh dvdcnds, shrc splI nd "whIc knghI".
AnIIkc0vcr dcvccs, ncknmcd rcpcllnI, Ikc Ihc I0rm 0I hcvy
b0rr0wng, "p0s0n pll", rcs0luI0ns rcqurcmcnIs, mngcmcnI c0nIrcIs,
'sIndsIll' grccmcnIs nd 'grccnml'. Thc succcss 0I mcrgcrs sh0uld bc
mcsurcd mnly n Icrms 0I Ihc cIIccIs 0n shrch0ldcr's wclIh. Asdc Ir0m
Ihc Inncl IcI0rs, 0Ihcr IcI0rs (qulIIvc) rc ls0 mp0rInI I0 Ihc
succcss 0I ny mcrgcr.
2b.b.
Usc Ihc I0ll0wng nI0rmI0n I0 nswcr qucsI0ns nd 2
g Plc nIcnds I0 cqurc Mcdum Plc whch hs Ihc I0ll0wng dI
Ernngs pcr shrc 2.00
0vdcnd pcr shrc .20 (hs |usI bccn pd)
Numbcr 0I shrcs 500,000
CurrcnI mrkcI prcc pcr shrc 24.00
. !I Ihc clculIcd c0sI 0I cquIy s 0 nd c0nsInI pcrpcIul gr0wIh
rIc 0I 7 n crnngs nd dvdcnds s cxpccIcd, whI s Ihc cxpccIcd
vluc 0I Mcdum Plc shrc!
A 30.00
40.00
C 42.80
0 48.00
E 24.00
2. !I Ihc currcnI mrkcI prcc 0I g Plc s b4 nd g Plc nIcnds I0 cqurc
Mcdum Plc I prcmum 0I 33.33, whI wll bc Ihc cxchngc rI0!
A 2 shrcs 0I g Plc I0r cvcry 5 shrcs 0I Mcdum Plc
shrc 0I g Plc I0r cvcry 2 shrcs 0I Mcdum Plc
C 2 shrcs 0I g Plc I0r cvcry shrc 0I Mcdum Plc
0 5 shrcs 0I g Plc I0r cvcry 2 shrcs 0I Mcdum Plc
E 3 shrcs 0I g Plc I0r cvcry 5 shrcs 0I Mcdum Plc
3. whch 0I Ihc I0ll0wng s N0T m0Ivc I0r mcrgng!
A !mpr0vcd mngcmcnI cIIccIvcncss
Ec0n0mcs 0I sclc
C Acccss I0 s0urcc 0I rw mIcrls
0 Rsk rcducI0n
E !ncrcsc c0mpcII0n.
4. whch 0I Ihc I0ll0wng s N0T I0rm 0I dvcsImcnI!
A PrIl scll0II
C0rp0rIc spn0II
377
C EquIy buybck
0 \0lunIry lqudI0n
E EquIy crvc0uI
5. Thc slc 0I dvs0n I0 Ihc mngcmcnI 0I IhI dvs0n whcrcby Ihc
purchsc s Innccd by Ihrd prIy gr0upnvcsI0r s cllcd______
A MngcmcnI buyn
MngcmcnI slc
C MngcmcnI buy0uI
0 MngcmcnI crvc0uI
E Lcvcrgcd buy0uI
2b.b.2
. Thc cc0n0mcs 0bIncd Ir0m mcrgcr s rcsulI 0I Ihc pcrI0rmncc 0I
Ihc c0mbncd Irms bcng grcIcr Ihn Ihc ddI0n 0I Ihcr scprIc
pcrI0rmnccs rc rcIcrrcd I0 s_________
2. A mcrgcr whcrcby Iw0 c0mpncs n Ihc smc ndusIry rc nv0lvcd s
kn0wn s ______________
3. whI s Ihc Icrm gvcn I0 Ihc rrI0nl bchv0ur 0I Ihc bddng c0mpny's
mngcmcnI whcrcby cxccssvc prcmum s pd I0r Ihc IrgcI c0mpny's
bcncIIs!
Usc Ihc I0ll0wng nI0rmI0n I0 nwcr qucsI0ns 4 & 5
M|0r Plc hs n cxsIng busncs whch s cxpccIcd I0 brng n ncI csh nIl0w 0I
2m I0r cch 0I Ihc ncxI 5 ycrs. Thc mrkcI cxpccIs 5 pcr nnum rIc 0I
rcIurn. M|0r Plc nIcnds I0 cqurc Mn0r Plc. Thc prcdcIcd nnul ncI csh
nIl0ws I0r Ihc cnlrgcd M|0r Plc m0unI I0 3m I0r Ihc ncxI 5 ycrs. Thc rcqurcd
rIc 0I rcIurn s cxpccIcd I0 bc 2 pcr nnum.
4. ClculIc Ihc vluc 0I Ihc cnlrgcd M|0r Plc
5. whI s Ihc mxmum prcc M|0r Plc s cxpccIcd I0 py I0r Mn0r Plc!
378
379
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ UndcrsInd whI dvcsImcnI mcns nd Is purp0sc,
+ ApprccIc Ihc vr0us Iypcs 0I dvcsImcnIs,
+ Expln Ihc Icrm "00ng prvIc" nd Is pplcI0n I0 c0rp0rIc rcsIrucIurng,
+ Expln Ihc dvnIgcs nd dsdvnIgcs 0I "g0ng prvIc",
+ Expln Ihc Icrm "buyns" s I0rm 0I c0rp0rIc rcsIrucIurng,
+ Expln Ihc Icrm "sIrIcgc llncc" s mcns 0I crryng 0uI c0rp0rIc rcsIrucIurng,
nd
+ Expln Ihc mn Iw0 Iypcs 0I sIrIcgc llncc"|0nI vcnIurcs" nd "vrIul c0mpncs".
!n Ihc lsI chpIcr s0mc spccIs 0I mcrgcrs nd cqusI0ns/Ikc0vcr wcrc
dscusscd. As rcsulI 0I ncw Ihnkng n Ihc c0rp0rIc mngcmcnI pr0ccss,
0Ihcr I0rms 0I c0mpny rcsIrucIurng hvc cmcrgcd. C0mpncs Ih0ughI 0I
Ihc nccd I0 I0cus 0n 'c0rc' cIvIcs hcncc Ihc cmcrgcncc 0I such I0rms 0I
rcsIrucIurng s dvcsImcnI, buyns, shrc rcpurchsc, rcvcrsc Ikc0vcr, nd
s0 0n.
0vcsImcnIs, ls0 kn0wn s dvcsIIurcs 0r dcmcrgcrs rsc Ir0m Ihc nccd I0
c0nccnIrIc 0n c0rc cIvIcs 0I Ihc busncss s0 s I0 crcIc vluc I0r Ihc
shrch0ldcrs.
Thc I0ll0wng rc cxmplcs 0I dvcsImcnIs:
27.2.
Thcsc 0ccur whcrc 0nc c0mpny sclls prI 0I Is busncss I0 n0Ihcr
c0mpny usully I0r csh 0r sccurIcs. !I s cxpccIcd IhI Ihc dsp0sl
wll crcIc vluc. Thc dccs0n crIcr0n s whcIhcr Ihc prcscnI vluc
0I Ihc sIrcm 0I IuIurc csh Il0ws 0I Ihc prI s0ld wll bc lcss (I I
rcmns) Ihn Ihc vluc rcccvcd.
380
27.2.2
A spn0II nv0lvcs Ihc nc0rp0rI0n 0I prI 0I Ihc busncss s
scprIc c0mpny nd Ihc ssuc 0I Is shrcs I0 Ihc shrch0ldcrs 0I
Ihc c0mpny Ir0m whch Ihs prI spn0II. Thcrc s n0 chngc n
0wncrshp. Spn0IIs my rsc Ir0m:
() Thc nccd I0 crvc 0uI scprIc dcnIIy I0r IhI prI 0I Ihc
busncss.
(b) Thc nccd 0I Ihc c0mpny I0 v0d Is Ikc0vcr. Spnnng 0II
vlublc prI 0I c0mpny my mkc Ihc rcmnng c0mpny
unIIrcIvc I0 n cqurcr.
27.2.3
!n M0, Ihc c0mpny sclls prIculr prI 0I Ihc busncss I0 Ihc
mngcmcnI 0I IhI prI 0I Ihc busncss, p0ssbly bccusc Ihc prI 0r
dvs0n n0 l0ngcr IIs n I0 Ihc 0vcrll sIrIcgc 0b|ccIvc 0I Ihc
c0mpny.
whcrc Inncng 0I M0s c0mc mnly Ir0m l0ns rscd by Ihc
mngcrs Ir0m bnks, Ihc rrngcmcnI bcc0mcs
(L0s).
27.2.4
Ths 0ccurs whcrc Ihc c0mpny s s0ld n Is cnIrcIy. A dccs0n I0 d0
Ihs sh0uld bc mdc gnsI Ihc bckdr0p 0I vluc crcI0n I0r Ihc
shrch0ldcrs. Thc bss 0I slc sh0uld bc IhI Ihc vluc 0I Ihc c0mpny
whcn lqudIcd s grcIcr Ihn Ihc prcscnI vlucs 0I Is sIrcm 0I
IuIurc csh Il0ws I n0I lqudIcd. Thc dc s IhI Ihc sscIs whcn
s0ld scprIcly I0 ndvdul buycrs w0uld hvc hghcr vluc Ihn
whcn s0ld s wh0lc s n mcrgcr.
27.2.5
Ths s smlr I0 spn 0II. !n n cquIy crvc 0uI h0wcvcr, 0rdnry
shrcs ssucd n rcspccI 0I Ihc dvs0n g0 I0 Ihc publc. Thc nIl
publc 0IIcrng (!P0) s 0nly n rcspccI 0I s0mc 0I Ihc subsdry shrcs.
Thc prcnI c0mpny d0cs n0I rclnqush I0Il c0nIr0l s I c0nInucs
I0 h0ld s0mc 0I Ihc shrcs 0I Ihc subsdry.
!n Ihs csc 0nly mn0rIy nIcrcsI s s0ld wIh Ihc slc pr0cccds
rcprcscnIng s0urcc 0I cquIy Inncc.
38
00ng prvIc smply mcns c0nvcrIng publc c0mpny nI0 prvIc 0nc.
Thc prvIcly hcld shrcs rc 0wncd by sclccI gr0up 0I nvcsI0rs wIh
subsInIl h0ldngs n Ihc hnds 0I Ihc mngcrs 0I Ihc c0mpny. Csh s
usully pd I0 Ihc publc shrch0ldcrs s c0mpcnsI0n. Thc rcs0ns I0r
publc c0mpny g0ng prvIc ncludc:
()
00ng nd rcmnng publc nv0lvcs l0I 0I c0sIs ncludng Ih0sc 0I
rcgsIcrng Ihc shrcs, dmnsIrIvc cxpcnscs 0I pr0ccssng nd
pyng dvdcnds, dmnsIrIvc cxpcnscs 0I Ilng rcp0rIs wIh NSE
nd SEC, hgh c0sIs 0I c0nducIng Annul 0cncrl MccIngs (A0M)
cIc.
(b)
MccIng wIh sI0ckbr0kcrs nd Inncl nlysIs whcn mkng "IcIs
bchndIhcIgurcs" prcscnII0n nd Ihc cmbrrssng qucsI0ns IhI
rc 0IIcn Ihr0wn I0 Ihc ChcI ExccuIvcs.
(c)
Thc nccd I0 I0cus 0n l0ngrun cc0n0mc crnngs rIhcr Ihn 0n
pcr0dc cc0unIng crnngs, submss0n 0I qurIcrly, hlIycrly nd
ycrly rcIurns.
(d)
whcn mngcrs ncrcsc Ihcr prIcpI0n n Ihc cquIy 0wncrshp
0I Ihc c0mpny Ihcrc s Icndcncy I0r Ihcsc mngcrs I0 w0rk hrdcr,
l0ngcr nd m0rc cIIccnIly Ihn bcI0rc. Thc Inncl dvnIgcs rc
0bv0us.
H0wcvcr, g0ng prvIc hs s0mc dsdvnIgcs. Thcsc ncludc:
() TrnscI0n C0sIs: Thc m0unI 0I m0ncy pyblc I0 nvcsImcnI
bnkcrs, lwycrs cn bc hgh.
() !nvcsI0rs lck 0I lqudIy: RcsulIng n Iyng d0wn l0I 0I
cpIl wIh Ihc c0mpny.
() RcsIrcIcd mrkcIblIy: Shrcs musI IrsI bc 0IIcrcd I0 Ihc
drccI0rs bcI0rc Ihcy c0uld bc s0ld I0 0uIsdc prIcs (RghI 0I
IrsI rcIusl).
382
!n buyns, gr0up 0I ndvduls, wh0 rc unc0nnccIcd wIh c0mpny,
mkcs n 0IIcr I0 purchsc prI 0I IhI c0mpny. Mny buyns nv0lvc
lrgcsclc Inncng: uyn 0IIcn 0ccurs whcn Ihc m|0r 0wncr 0I 0nc
mn Imly busncss s plnnng I0 rcIrc.
whcrc c0mpny clcrly sccs Ihc syncrgy (bcncIIs) Ir0m mcrgng wIh
n0Ihcr c0mpny buI lcks Ihc rcs0urccs I0 cxccuIc sIrIcgc mcrgcr, I
cn cnIcr nI0 sIrIcgc llncc wIh IhI c0mpny.
Als0 cllcd c00pcrIvc rrngcmcnIs, sIrIcgc llnccs dIIcr Ir0m
mcrgcrs n IhI mcmbcrs kccp Ihcr lcgl nd physcl cxsIcncc. 0nc Iypcl
cxmplc 0I sIrIcgc llncc s Ihc 0nc I0rmcd bcIwccn c0mpny nd
Is supplcr n 0rdcr I0 mkc 1!T nvcnI0ry sysIcm w0rk cIIccIvcly. Ths wll
hclp Ihc sIrIcgc 0b|ccIvc 0I Ihc c0mpny I0 bc chcvcd.
27.5.
Ths s 0nc I0rm 0I sIrIcgc llncc whcrc Iw0 0r m0rc c0mpncs
grcc I0 I0rm scprIc C0mpny whch wll bc mngcd n such
wy IhI wll chcvc Ihcr ndvdul c0rp0rIc 0b|ccIvcs.
27.5.2
A vrIul c0mpny hs bccn dcIncd s 0nc IhI s nv0lvcd n lrgc
sclc 0uIs0urcng 0I Is busncss cIvIcs. Ths s rcccnI
dcvcl0pmcnI n USA whcrc I s kn0wn s \rIul C0mpny.
0uIs0urcng, whch s n0w Ihc mn IuncI0n 0I vrIul c0mpny,
ll0ws c0mpny I0 I0cus 0n Is c0rc cIvIcs whcrc I hs c0mpcIIvc
dvnIgc. whcn 0uIs0urcng s n0w Ikcn I00 Ir by c0mpny, I0r
cxmplc, whcrc mnuIcIurng c0mpny 0uIs0urccs Is pr0ducI0n
cIvIcs, Ihc c0mpny bcc0mcs vrIul c0mpny. A vrIul c0mpny
mghI I0r nsIncc, bccusc 0I Ihc vluc I IIchcs I0 Is brnd nmc,
0uIs0urcc ll Is mnuIcIurng pr0ccsscs nd gvc ll Is Imc I0 Ihc
mngcmcnI 0I Is brnd. Smlrly, I c0mpny's c0rc c0mpcIcnccs
wcrc n mrkcIng nd dsIrbuI0n nd n0I n mnuIcIurng, Ihc
c0mpny mghI c0nIrcI 0uI Ihc mnuIcIurng spccI nd c0nccnIrIc
0n mrkcIng nd dsIrbuI0n s0 IhI I cn 0bIn c0mpcIIvc cdgc.
383
!n vcw 0I ncw Ihnkng IhI hs cv0lvcd n Ihc mngcmcnI pr0ccss, mny
I0rms 0I c0rp0rIc rcsIrucIurng hvc cmcrgcd, prI Ir0m mcrgcrs nd
cqusI0ns. Thcsc ncludc dvcsImcnIs (0r dvcsIIurcs), g0ng prvIc, buy
ns nd sIrIcgc llnccs. All I0rms 0I rcsIrucIurng hvc Ihc 0b|ccIvc 0I
crcIng vlucs I0r Ihc 0wncrs 0I Ihc busncss.
0vcsImcnIs cn bc n Ihc I0rm 0I scll0IIs, spn0IIs, mngcmcnI buy0uIs
(M0), lcvcrgcd buy0uIs (L0), v0lunIry lqudI0n nd cquIy crvc
0uIs.
SIrIcgc llnccs cn bc n Ihc I0rm 0I |0nI vcnIurcs nd whI s Icrmcd
vrIul c0mpncs.
27.7.
. Thc I0ll0wng rc cxmplcs 0I dvcsImcnIs EXCEPT
A Scll0II
Spn0II
C uyns
0 \0lunIry LqudI0n
E EquIy crvc 0uIs.
2. whch 0I Ihc I0ll0wng s N0T g00d rcs0n I0r publc c0mpny g0ng
prvIc!
A Hgh c0sIs 0I g0ng publc nd rcmnng Ihcrc.
Av0dncc 0I cmbrssmcnI n ccrIn sIuI0ns.
C F0cusng 0n l0ngIcrm cc0n0mc crnngs rIhcr Ihn sh0rIIcrm
pr0IIs
0 Mkng shrcs I0 bc m0rc mrkcIblc
E EnhnccmcnI 0r nccnIvcs I0 w0rk hrdcr.
3. whcrc gr0up 0I ndvduls 0uIsdc Ihc c0mpny mkcs n 0IIcr I0
purchsc prI 0I Ihc c0mpny, Ihs s kn0wn s
A EquIy crvc0uI
Scll0IIs
C uy0uIs
0 uyns
E Spn0IIs
384
4. whcn c0mpny sclls prIculr prI 0I Ihc busncss I0 Ihc mngcmcnI
0I IhI prI 0I Ihc busncss, Ihs s kn0wn s _____________
A Scll0IIs
Spn0IIs
C MngcmcnI buy0uIs
0 EquIy crvc 0uIs
E 0cbcnIurc crvc 0uIs,
5. whch 0nc 0I Ihc I0ll0wng s N0T dsdvnIgc 0I 'g0ng prvIc'!
() !nvcsI0rs' lck 0I lqudIy
() RcsIrcIcd mrkcIblIy 0I Ihc shrcs
() ClcnIclc cIIccIs.
A () 0nly
() 0nly
C () 0nly
0 () nd ()
E () nd ()
27.7.2
. A c0mpny whch s nv0lvcd n lrgc sclc 0uIs0urcng 0I Is busncss
cIvIcs s cllcd ________________
2. SIIc Ihc mn dIIcrcncc bcIwccn sIrIcgc llncc nd mcrgcr.
3. whI s Ihc mn dIIcrcncc bcIwccn spn0IIs nd scll0IIs!
4. whI rc lcvcrgcd buy0uIs!
5. whI sh0uld bc Ihc cc0n0mc |usIIcI0n I0r c0mpny g0ng nI0
v0lunIry lqudI0n!
385
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ Kn0w Ihc Inncl 0b|ccIvcs 0I SMEs,
+ Kn0w Ihc CpIl !nvcsImcnI pprsl mcIh0d usully uscd by SMEs,
+ Expln h0w rsk sh0uld bc nc0rp0rIcd nI0 Ihc pprsl pr0ccsscs 0I SMEs nd
sIIc whcIhcr 0r n0I SMEs mngcrs sh0uld dvcrsIy rsk,
+ SIIc nd cxpln Ihc vr0us s0urccs 0I Inncc vlblc I0 SMEs,
+ McnI0n Ihc pr0blcms Iypclly Iccd by SMEs n cccssng Inncc,
+ Expln gcrng (Inncl lcvcrgc) n SMEs,
+ UndcrsInd Ihc pr0ccss 0I vlung SMEs shrcs, nd
+ Expln Ihc dvdcnd p0lcy 0I SMEs.
Thc smll nd mcdum sclc cnIcrprscs hvc n0 unvcrslly cccpIcd
dcInI0n. Thc crIcr c0mm0nly uscd, h0wcvcr, I0 dcscrbc smll nd
mcdum sclc cnIcrprscs (SMEs) rc numbcr 0I cmpl0yccs, cpIl nvcsIcd,
slcs Iurn0vcr nd I0Il sscIs bsc. N0IwIhsIndng Ihc bscncc 0I n cxcI
dcInI0n, Ihc I0ll0wng my bc sd I0 bc Ihc IcIurcs 0I SMEs:
() Thc 0wncrshp 0I Ihc Irm nd Is c0nIr0l rc n0I 0IIcn scprIcd: b0Ih
rc n Ihc hnds 0I Icw cl0scly rclIcd pc0plc, pr0bbly wIhn Ihc
smc Imly.
(b) Thc c0mpny's shrcs rc usully n0I qu0Icd 0n Ihc sI0ck mrkcI
(c) Thc nI0rml rclI0nshp m0ng cmpl0yccs n Ihc 0rgnzI0n
d0mnIcs Ihc I0rml rclI0nshp.
(d) !n m0sI cscs, Ihcr 0uIpuIs rc l0clly s0ld nd Ihcr npuIs rc
smlrly, l0clly s0urccd.
(c) MngcmcnI sIrucIurc s unc0mplcIcd hcncc, Ihcrc s spccdy
dccs0nIkng pr0ccss.
38b
Sncc Ihc 970s, Ihc g0vcrnmcnI I Ihc ccnIrc nd 0Ihcr sIkch0ldcrs n Ihc
prvIc sccI0r hd bccn sh0wng vcry kccn nIcrcsI n SMEs. Ths s pr0bbly
duc I0 Ihc rcc0gnI0n 0I Ihcr grcI p0IcnIls I0r crcIng |0b 0pp0rIunIcs,
cnhncng cpcIy buldng nd pr0m0Ing Ihc cc0n0mc dcvcl0pmcnI 0I
Ihc nI0n. !n 0rdcr I0 Ikc dvnIgc 0I mxmum bcncIIs ccrublc Ir0m
csIblshmcnI nd 0pcrI0n 0I SMEs, vr0us gcnccs nd spcclzcd
Inncl nsIIuI0ns wcrc scI up by Ihc Fcdcrl 00vcrnmcnI. Thcsc ncludc
Smll nd Mcdum EnIcrprscs 0cvcl0pmcnI Agcncy (SME0AN), Ihc Ngcrn
nk 0I !ndusIry, C0mmunIy bnks n0w Mcr0Inncc bnks. H0wcvcr,
bccusc 0I ccrIn IcI0rs (s0mc 0I whch wll bc dscusscd n Ihs chpIcr)
Ihc 0b|ccIvcs I0r whch Ihcsc nsIIuI0ns wcrc scI up hvc, up I0 n0w, n0I
bccn chcvcd.
Thc I0cus 0I Ihs chpIcr wll bc 0n Ihc Inncl mngcr's cIvIcs IhI
cn bc spccIclly dcnIIcd wIh SMEs. S0mc 0I Ihcm wll bc dscusscd n
Ihc c0nIcxI 0I c0mpny Inncl 0b|ccIvcs, cpIl nvcsImcnI pprsl
nd Is IIcndnI rsk, vlblc s0urccs 0I Inncc nd IIcndnI pr0blcms
0I cccssng Iunds, gcrng, vluI0n nd dvdcnd p0lcy.
!n lrgc c0mpny, whcrc 0wncrshp s scprIcd Ir0m c0nIr0l, I hd bccn
sd IhI mngcmcnI sh0uld mxmsc shrch0ldcrs wclIh. !n SME, Ihc
mngcrs rc ls0 lkcly I0 bc subsInIl shrch0ldcrs. !n Ihs sIuI0n,
Ihc cI0n whch mngcmcnI wll Ikc s unccrIn. 0n 0nc hnd, mngcrs
mghI bc mxmsng Ihcr 0wn wclIrc, 0n Ihc 0Ihcr hnd Ihcy mghI bc
pursung Ihc purc wclIh mxmsI0n 0b|ccIvc I0 Ihc lcIIcr. whI s
ccrIn, h0wcvcr, s IhI shrch0ldcrs n SMEs hvc 0Ihcr purp0scs I0r
nvcsIng n Ihc cnIcrprscs. Mngcrs d0, s much s p0ssblc, undcrsInd
Ihcsc pcrs0nl purp0scs nd IIcmpI I0 IulIll Ihcm I0r Ihcr shrch0ldcrs. !I
sh0uld bc n0Icd, h0wcvcr, IhI Ihc wclIh mxmsI0n 0b|ccIvc sIll
rcmns mp0rInI.
28.3.
Mngcrs n SMEs nvrbly usc Ihc lcss s0phsIcIcd buI nc0rrccI
pprsl mcIh0ds such s pybck pcr0d nd cc0unIng rIc 0I
rcIurn. As mcnI0ncd b0vc, wclIh mxmsI0n sIll rcmns n
mp0rInI 0b|ccIvc wIh whch SMEs mngcrs musI rcc0nclc
Ihcmsclvcs. A c0mpny IhI c0nInully Ikcs Inncl dccs0ns IhI
sysIcmIclly rcducc vluc, nsIcd 0I ddng vluc, w0uld s00ncr
0r lIcr g0 nI0 cxIncI0n. Undcr Ihs crcumsIncc, Ihc c0rrccI Ih0ugh
s0phsIcIcd Icchnquc lkc NP\ 0r !RR sh0uld bc uscd n SMEs
pprsls.
387
28.3.2
H0w sh0uld rsk bc nc0rp0rIcd nI0 Ihc nvcsImcnI pprsl pr0ccss
n SMEs! !I hs bccn sd IhI n lrgc Irm, Ihc dsc0unI rIc I0 usc
sh0uld bc Ihc 0nc IhI nc0rp0rIcs 0nly Ihc sysIcmIc rsk 0I Ihc
sccurIcs 0I Ihc Irm. Thc rcs0n I0r Ihs s IhI Ihc Irm's shrch0ldcrs
rc ssumcd I0 h0ld 0nly smll pr0p0rI0n, by vluc, 0I Ihc Irm's
I0Il shrcs n wclldvcrsIcd p0rII0l0s. H0wcvcr n SME, Ihs
p0sI0n d0cs n0I h0ld: nvcsI0rs rc n0I cxpccIcd I0 bc s0 wcll
dvcrsIcd. AlIh0ugh, Ihcy my h0ld shrcs n dIIcrcnI c0mpncs,
Ihc m0unI 0I nvcsImcnI n SME, s pcrccnIgc 0I Ihc I0Il p0rII0l0
s lkcly I0 bc lrgc. F0r Ihs rcs0n Ihc dsc0unI rIc I0 usc n SME
nvcsImcnI pprsl sh0uld nc0rp0rIc b0Ih sysIcmIc nd
unsysIcmIc rsk. Pcrhps, such 0Ihcr dcvccs s scnsIvIy nlyss,
ccrInIy cquvlcnI mcIh0d, w0rsIp0ssblc, bcsIp0ssblc ppr0ch
my bc nc0rp0rIcd.
28.3.3
!n lrgc Irm, shrch0ldcrs wh0 wcrc ssumcd I0 bc lrcdy wcll
dvcrsIcd wll n0I gn ny cxIr bcncIIs whcrc mngcrs crry 0uI
IurIhcr dvcrsIcI0n 0I Ihcr 0pcrI0ns wIhn Ihc c0mpny. H0wcvcr
n SME, nd I0r rcs0n dduccd b0vc, Ihc mngcrs my dvcrsIy
Ihc Irm's 0pcrI0ns, (s shrch0ldcrs mghI n0I bc blc I0 d0 Ihs
Ihcmsclvcs) wIh Ihc 0b|ccIvc 0I rcducng unsysIcmIc rsk.
Thc I0ll0wng rc Ihc s0urccs 0I Inncc vlblc I0 SMEs:
28.4.
Ths s Inncc nIr0duccd nI0 Ihc busncss by Ihc 0wncr. !I usully
rscs Ir0m Ihc pcrs0nl ccumulIcd svngs 0I Ihc 0wncr hmsclI,
csh nd pr0pcrIy nhcrIcd by hm Ir0m sy hs lIc prcnIs, grnIs
Ir0m hs lvng prcnIs, rclIvcs nd Ircnds, l0ns gvcn I0 hm by
ndvduls nd ss0cI0n such s c00pcrIvc s0ccIcs nd s0 0n.
!n Ngcr ll Ihcsc c0nsIIuIc m|0r s0urcc 0I csIblshmcnI cpIl
I0r SME. Thc dvnIgc 0I ll Ihcsc s0urccs s IhI Iunds cn bc
cccsscd spccdly nd n s0mc cscs wIh0uI ny cxplcI nIcrcsI c0sI.
H0wcvcr, Ihc m0unI IhI s usully rscd Ihr0ugh Ihcsc s0urccs s,
n m0sI cscs smll.
28.4.2
AlIh0ugh, b0Ih smll nd lrgc Irms rcly hcvly 0n nIcrnlly
gcncrIcd Iunds I0r IuIurc cxpns0n nd gr0wIh, Ihc smll I0 mcdum
388
Irms puI much grcIcr rclncc 0n Ihcsc Iunds. Ths s bccusc 0I Ihc
grcIcr dIIculIy Ihcy hvc n cccssng cxIcrnl Inncc. !nIcrnlly
gcncrIcd Iunds rcprcscnI pr0IIs crncd n Ihc psI buI n0I dsIrbuIcd
s dvdcnds I0 0wncrs 0I Ihc busncss (rcIncd pr0IIs).
28.4.3
Thc c0mmcrcl bnks c0nsIIuIc vcry mp0rInI s0urcc 0I dcbI
Inncc I0r Ihc SMEs, lIh0ugh, Ihcy rc mnly nv0lvcd n Ihc
pr0vs0n 0I 0vcrdrIIs. Thcy chrgc bcIwccn 2 nd 5 b0vc Ihcr
prmc lcndng rIcs. S0mc SMEs, h0wcvcr, hvc cccss I0 mcdum
Icrm nd l0ngIcrm l0ns.
28.4.4
Ths s Inncc gvcn by ndvduls nd nsIIuI0ns wh0 wnI I0 bc
prI0wncrs 0I SME. C0mmcrcl bnks cn, by lw, ls0 prIcpIc
n Ihc cquIy 0I SMEs. y SccI0n 2 0I Ihc nks nd 0Ihcr Fnncl
!nsIIuI0ns AcI (0F!A) 99 (s mcndcd), c0mmcrcl bnk my
cqurc 0r h0ld prI 0I n0I m0rc Ihn 40 pcr ccnI 0I Ihc shrc cpIl
0I ny grculIurl, ndusIrl 0r vcnIurc cpIl c0mpny, pr0vdcd
such cquIy prIcpI0n s n0I m0rc Ihn 0 pcr ccnI 0I Ihc bnk's
shrch0ldcrs' Iund unmprcd by l0sscs, nd I0Il m0unI 0I h0ldng
I0r ll c0mpncs s n0I m0rc Ihn 20 pcr ccnI.
As c0mplmcnI I0 g0vcrnmcnI p0lcy mcsurcs n Ihc pr0m0I0n 0I
SMEs, Ihc c0mmcrcl bnks, Ihr0ugh Ihc nkcrs' C0mmIIcc, ls0
csIblshcd schcmc kn0wn s 'Smll nd Mcdum !ndusIry EquIy
!nvcsImcnI Schcmc (SM!E!S)'. Thc schcmc, whch s n0w dcIuncI,
rcqurcd ll bnks n Ngcr I0 scI sdc 0 pcr ccnI 0I Ihcr pr0IIs
bcI0rc Ix I0r nvcsImcnI n I0rm 0I cquIy n clgblc ndusIrcs n Ihc
rcl sccI0r 0I Ihc cc0n0my, spccIclly n gr0llcd, nI0rmI0n
Icchn0l0gy nd Iclcc0mmuncI0ns, mnuIcIurng, cducI0nl
csIblshmcnIs scrvccs, I0ursm nd lcsurc, s0ld mncrls,
c0nsIrucI0n nd ny 0Ihcr cIvIy s my bc dcIcrmncd Ir0m Imc
I0 Imc. !I sh0uld bc n0Icd, h0wcvcr, IhI Ihc rIc 0I cIul
dsburscmcnI 0I Ihs Iund I0 pr0spccIvc bcncIcrcs ws vcry l0w.
C0nscqucnIly, Ihc schcmc ws dsc0nInucd wIh, 0n Ihc c0mng 0n
sIrcm 0I mcr0Inncc bnks.
SMEs cn ls0 cccss, lIh0ugh I0 lmIcd cxIcnI, cquIy Inncc v
Ihc mcdum 0I Ihc Scc0ndTcr SccurIcs MrkcI (SSM) 0I Ihc Ngcrn
SI0ck Exchngc (NSE). Thc c0ndI0ns I0r cnIcrng Ihs mrkcI wcrc
rclxcd, c0mprcd wIh Ih0sc 0n Ihc IrsIIcr. Thc 0b|ccIvc ws I0
crcIc I0r Ihc SMEs, cccss I0 Ihc Ngcr SI0ck MrkcI. SSM, lkc
SM!E!S, chcvcd lIIlc succcss n Icrms 0I pr0vs0n 0I l0ngIcrm cquIy
Iunds I0r Ihc SMEs.
389
28.4.5
()
!n hcr bd I0 Ikc mxmum dvnIgc 0I Ihc p0IcnIls 0I SMEs,
Ihc Fcdcrl 00vcrnmcnI csIblshcd Ihc nk 0I !ndusIry (0!).
Ths bnk I00k 0vcr Ihc cIvIcs 0I Ihc dcIuncI Ngcrn nk
I0r C0mmcrcc nd !ndusIry (NC!) Ihc NI0nl Ec0n0mc
Rcc0nsIrucI0n Fund (NERFUN0) nd Ngcrn !ndusIrl
0cvcl0pmcnI nk (N!0) ll 0I whch hd rcsp0nsblIcs I0r
pr0m0Ing c0IIgc nd smll nd mcdum cnIcrprscs.
(b)
!n vcw 0I Ihc pr0blcms Iccd by SMEs n rsng Inncc Ir0m
c0mmcrcl bnks, Ihc Fcdcrl 00vcrnmcnI, Ihr0ugh Ihc CcnIrl
nk 0I Ngcr (CN), csIblshcd c0mmunIy bnks
spccIclly I0 cIcr I0r Ihc nccds 0I SMEs. C0mmunIy bnks
wcrc rcccnIly IrnsI0rmcd nI0 Mcr0Inncc nks (MFs).
!n cc0rdncc wIh Ihc CN gudclncs I0r MFs n Ngcr, Ihc
pcrmssblc cIvIcs 0I MF shll, m0ng 0Ihcrs, ncludc:
() Pr0vs0n 0I crcdI I0 Is cusI0mcrs, ncludng I0rml nd
nI0rml sclIhclp gr0ups, ndvduls, nd s0 0n.
() Pr0m0I0n nd m0nI0rng 0I l0n usgc m0ng Is
cusI0mcrs by pr0vdng ncllry cpcIy buldng n
such rcs s rcc0rd kccpng nd smll busncss
mngcmcnI,
() 0pcrI0n 0I mcr0 lcsng IclIcs, mcr0Inncc
rclIcd hrcpurchsc nd rrngcmcnI 0I c0ns0rIum
lcndng nd supcrvs0n 0I crcdI schcmcs I0 cnsurc
cccss 0I mcr0Inncc cusI0mcrs I0 npuIs I0r Ihcr
cc0n0mc cIvIcs
(v) !nvcsImcnI n shrcs 0r cquIy 0I nyb0dy c0rp0rIc, Ihc
0b|ccIvc 0I whch s I0 pr0vdc mcr0Inncc scrvccs I0
p00r pcrs0ns.
(v) Enc0urgcmcnI 0I nvcsImcnI n c0IIgc ndusIrcs nd
nc0mcgcncrIng pr0|ccIs I0r p00r pcrs0ns s my bc
prcscrbc by Ihc CN.
!n vcw 0I Ihc b0vc pr0vs0ns, I c0uld bc sd IhI SMEs sInd
g00d chncc n sccurng Inncc Ir0m MFs.
390
\cnIurc cpIl my bc dcscrbcd s cpIl whch s pr0vdcd
I0r ncw, gr0wng c0mpncs wh0sc I0undcrs p0sscss, Ihc
ncccssry cnIrcprcncurl IlcnIs buI lck Inncc nd busncss
mngcmcnI sklls. Thc I0ll0wng rc Ihc chrcIcrsIcs 0I
\cnIurc CpIl:
() Hgh rsk nvcsImcnI nsIcd 0I Ihc n0rml rsk
nvcsImcnI ss0cIcd wIh qu0Icd shrcs.
() N0I |usI p0rII0l0 0I sccurIcs, nsIcd Ihcrc s cl0sc
w0rkng rclI0nshp bcIwccn Ihc SME nd Ihc pr0vdcrs
0I vcnIurc cpIl.
() !I s ncIhcr sh0rIIcrm nvcsImcnI n0r pcrmncnI
l0ngIcrm nvcsImcnI. Thc cqusI0n 0I shrcs n Ihc
SME s cxpccIcd I0 bc I0r mcdumIcrm sy 3 ycrs
IIcr whch Ihc nvcsImcnI wll bc rclzcd I pr0II.
F0ur Iypcs 0I vcnIurc cpIl cn bc dcnIIcd, dcpcndng 0n
Ihc sIIc 0I Ihc smll/mcdum Icrm cnIcrprsc:
()
Ths s cpIl rcqurcd by ncw c0mpny durng l0ng
pcr0d 0I rcscrch nd dcvcl0pmcnI.
()
Ths s vrI0n 0I Ihc Sccd CpIl. Hcrc rcscrch
hs bccn c0mplcIcd nd Ihc pr0ducI hs bccn dcvcl0pcd.
P0sIvc csh Il0w s cxpccIcd wIhn sh0rI pcr0d 0I
Imc. !n Ihc mcnImc, Iunds rc nccdcd I0 supp0rI
0pcrI0ns n nIcpI0n 0I p0sIvc csh Il0w.
()
Ths s ddI0nl cpIl nccdcd by y0ung c0mpncs
IhI hvc sIrIcd wcll, buI rc sIll gr0wng.
(v)
Ths s cpIl nccdcd I0r cxpns0n by n lrcdy
csIblshcd c0mpny wIh s0und 0pcrI0nl Irck.
\cnIurc CpIlsIs rc usully nv0lvcd n Ihc Inncng 0I hgh
rsk pr0|ccIs, hcncc Ihcy n0rmlly sk I0r hgh rIc 0I rcIurn.
Als0, m0nI0rng 0I smll c0mpncs Ikcs l0I 0I Ihcr Imc.
39
\cnIurc cpIlsIs, n ddI0n, usully c0nsdcr h0w I0 cxI, I
pr0II, Ir0m Ihcr nvcsImcnIs. Ths s rcIcrrcd I0 s "Ihc cxI
r0uIc" nd smply mcns h0w Ihcy wll bc blc I0 scll Ihcr
shrcs. Thc I0ll0wng p0ssblIcs cxsI.
() Thc c0mpny rrngcs I0r Is shrcs I0 bc qu0Icd 0n Ihc
SI0ck Exchngc.
() Thc c0mpny s s0ld I0 n0Ihcr c0mpny.
() Thc c0mpny s s0ld I0 Is cxsIng mngcmcnI
(mngcmcnI buy0uI).
(v) RcplccmcnI wIh n0Ihcr vcnIurc cpIlsI.
(v) Thc c0mpny s s0ld I0 gr0up 0I ndvduls whch hd
n0I hd ny prcv0us rclI0nshp wIh Ihc c0mpny
(mngcmcnI buyn).
(v) Thc c0mpny s lqudIcd.
28.4.b
0Ihcr s0urccs 0I Inncc vlblc I0 SMEs rc Ihc 0nlcndng
rrngcmcnI mdc by Ihc Fcdcrl 00vcrnmcnI wIh nIcrnI0nl
Inncl nsIIuI0ns nd mulIlIcrl Iundng gcnccs lkc AIrcn
0cvcl0pmcnI nk (A0), !nIcrnI0nl Fnncc C0rp0rI0n (!FC)
UnIcd NI0ns 0cvcl0pmcnI Pr0grm (UN0P), !nIcrnI0nl Lb0ur
0rgnsI0n (!L0) nd UnIcd SIIcs Agcncy I0r !nIcrnI0nl
0cvcl0pmcnI (USA!0)
!I wll bc sccn Ir0m Ihc b0vc IhI Ihc Inncng pr0blcms 0I SMEs d0 n0I
rsc Ir0m IhI 0I vlblIy, rIhcr I s duc I0 lck 0I cccssblIy. Thc
nblIy 0I SMEs I0 cccss Ihc much nccdcd Iunds I0r gr0wIh cn bc scrbcd
I0 mny IcI0rs. Thcsc IcI0rs wll bc hghlghIcd Ir0m Ihc p0nIs 0I vcw 0I
Ihc bnks, Ihc \cnIurc CpIlsIs, Ihc SMEs Ihcmsclvcs nd Ihc g0vcrnmcnI.
28.5.
()
Thc bnks rc sh0rIIcrmsIs n Ihc rc 0I lcndng I0 busncsscs.
Pr0bbly duc I0 Ihc IcI IhI m0sI 0I Ihcr Iunds rc sccurcd 0n
sh0rIIcrm bss (sh0rIIcrm dcp0sIs), bnks rc nIurlly n0I
dsp0scd I0 lcndng l0ngIcrm.
392
(b)
nks pcrccvc SMEs s hghrsk cnIcrprscs nd w0uld n0I
|usI pr0vdc Iunds I0r Ihcsc cnIcrprscs. whcrc Ihcy d0, Ihcy
dcmnd I0r pr0hbIvc rIc 0I rcIurn.
(c)
Thc bnks bclcvc IhI SMEs l0ns c0nsIIuIc hgh dcmnd
0n Ihcr Imc: Ihcy IhcrcI0rc chrgc hgh dmnsIrIvc c0sIs.
FurIhcrm0rc, Ihc IcI IhI Ihcsc c0sIs hvc I0 bc sprcd 0vcr
smll ssucs, mkcs I cvcn much m0rc cxpcnsvc I0 SMEs I0
cccss bnk Inncc Ihn lrgc Irms.
(d)
Thc bnks 0IIcn Ind I dIIculI I0 sscss Ihc rsk 0I pr0|ccIs
prcscnIcd by SMEs. Ths mghI bc duc I0 mpr0pcr prcscnII0n
0I nI0rmI0n by Ihc SME pr0prcI0rs. whcrc Ihc nI0rmI0n
s ccurIc nd pr0pcrly prcscnIcd, Ihc bnks rc 0IIcn bscd
n Ihcr sscssmcnI 0I rsk n n IIcmpI I0 0vcrpr0IccI
Ihcmsclvcs. Ths s prIculrly cvdcnI n Ihc csc 0I SMEs
wIh n0 cpIl 0I Ihcr 0wn.
(c)
Thc bnks 0IIcn gvc sIrngcnI c0ndI0ns I0 Ihc SMEs mny 0I
whch rc dIIculI I0 c0mply wIh. 0nc prIculr nhbIvc
c0ndI0n s Ihc dcmnd I0r sccurIy I0r Ihc l0n. Mny SMEs
d0 n0I hvc such sccurIy I0 puI Ihcm s c0llIcrl.
28.5.2
()
Thc vcnIurc cpIlsI's dcmnd I0r hgh ycld. Hc s n0I
sIsIcd wIh |usI dvdcnds I0r cquIy nvcsImcnI. Scrccly
cn SMEs 0bIn pr0|ccIs IhI cn bc pr0IIblc n Ihc Icc 0I
such hgh Inncc c0sIs.
(b)
\cnIurc CpIlsIs ls0 rcqurc Ihs hghycld wIhn sy
pcr0d 0I Ihrcc ycrs whcrcs Ihc hgh Icchn0l0gclly bscd
ndusIrcs n whch Ihcy rc nvcsIng Ikc much l0ngcr
rcscrch nd dcvcl0pmcnI pcr0d. Thcy IhcrcI0rc, cxpcrcncc
dcly n gcncrIng csh.
393
(c)
\cnIurc CpIlsIs bclcvc IhI SMEs Ikc up l0I 0I Ihcr
mngcmcnI Imc. Thcr c0nIcnI0n s IhI SMEs w0uld nccd
cl0sc m0nI0rng nd much spcclsI dvcc durng Ihcr
dcvcl0pmcnIl sIgc.
28.5.3
Lck 0I cccssblIy I0 Inncc my bc cuscd by Ihc SMEs Ihcmsclvcs
I0r Ihc I0ll0wng rcs0ns:
()
A SME's nblIy I0 pr0vdc c0llIcrl 0r Is n blIy I0 pr0vdc
dcquIc c0llIcrl mghI bc 0nc rcs0n I cnn0I cccss
bnk's Iunds.
(b)
Mny SMEs d0 n0I kn0w 0I Ihc cxsIcncc 0I vlblc s0urccs 0I
Inncc IhI mccI Ihcr spccIc nccds. Thcr c0mm0n p0rI 0I
cll I0r Inncl sssIncc, s Ihc l0cl brnch mngcr 0I
bnk.
(c)
AI Imcs, SMEs mghI n0I hvc bnkblc pr0|ccIs. Pr0|ccIs IhI
rc n0I vblc rc bcng Ikcn I0 Ihc bnks nd Ihc rcsp0nsc
Ihcy gcI s usully ncgIvc.
(d)
Thc mpr0pcr prcscnII0n 0I pr0|ccI's pr0p0sl s n0Ihcr rcs0n
IhI SMEs cnn0I cccss bnks' Inncc. Als0 nI0rmI0n IhI
s pr0vdcd mghI bc ndcquIc
(c)
SMEs d0 n0I n0rmlly hvc Ihc rcqurcd cxpcrIsc n Ihc rcs
0I pr0ducI0n, mnIcnncc, Inncc nd s0 0n. Thcy, IhcrcI0rc,
cnn0I pr0ducc g00d busncss pln.
(I)
Thcrc s 0IIcn n0 Irnsprcncy n Ihc nI0rmI0n pr0vdcd 0n
pr0|ccI's pr0p0sl. 0I s 0IIcn mnpulIcd I0 suI Ihcr
rcqucsIs.
(g)
Ths s c0mm0n cc0unIng prcIcc by SMEs. Thcy d0 n0I
p0sscss g00d cc0unIng nI0rmI0n sysIcm IhI wll gvc
0uI ccurIc, Imcly nd rclcvnI nI0rmI0n.
394
(h)
S0mc SMEs mngcrs rc s0 Innclly nvc nd ncpI IhI
Ihcy bclcvc Ihcy |usI d0 n0I hvc I0 b0rr0w. Ths mghI bc
scrbcd I0 Ihc Icr 0I dluI0n 0I c0nIr0l.
28.5.4
()
Ths s pr0blcm IhI IIccIs mny Irms ncludng SMEs. Lck
0I g00d r0ds, cplcpIc supply 0I clccIrcIy nd bscncc 0I
g00d wIcr supply subsInIlly ncrcsc Ihc c0sIs 0I runnng
n 0rgnzI0n.
(b)
AlIh0ugh, Ihc Fcdcrl g0vcrnmcnI hd bccn d0ng l0I n
cducIng Ihc cIzcns 0n Ihc vlblc s0urccs 0I Inncc I0r
SMEs, Ihc publcIy s n0I cn0ugh I0 chcvc Ihc rcqurcd
succcss.
(c)
Thcrc s sIll cvdcncc IhI Ihc csIblshcd nsIIuI0ns, I0r
cxmplc, Ihc MFs rc n0I sIrcIly I0ll0wng Ihc CN gudclncs.
Thc c0sI 0I cccssng mny MFs Iunds s sIll vcry hgh. Thc
cxsIcncc 0I hgh nIcrcsI rIcs mghI n0I bc unrclIcd I0
ndcquIc supcrvs0n 0n Ihc prI 0I CN 0IIcls.
(d)
Thcrc s n0 nsIIuI0nl c00rdnI0n 0I Ihc Fcdcrl
g0vcrnmcnI cII0rIs nd Ihc cII0rIs 0I Is gcnccs n cnsurng
IhI SMEs hvc cccss I0 Inncc. Thcrc s nccd, I0r cxmplc,
I0r Ihc g0vcrnmcnI gcnccs Ihc Smll nd Mcdum
EnIcrprscs 0cvcl0pmcnI Agcncy (SME0AN), Ihc CN I0 dcsgn
pr0grmmcs I0r cccssng Iunds I0r Ihc SMEs, 0rgnsc
scmnrs nd w0rksh0ps nd s0 0n. AlIh0ugh Ihc gcnccs
mghI hvc bccn d0ng s0mc 0I Ihcsc cIvIcs, Ihcy hvc n0I
bccn d0ng cn0ugh I0 chcvc Ihc rcqurcd succcss.
(c)
Thcrc ppcr I0 bc lck 0I Irnsprcncy n Ihc crcdI pr0ccsscs
0I Ihc nsIIuI0ns IhI wcrc spccIclly scI up n Ihc psI I0r
Ihc Inncng 0I SMEs. Ths rcsulIcd n p00r rcpymcnI
pr0grmmcs, hgh rIc 0I bd dcbIs nd cvcnIul Ilurc 0I
Ihcsc nsIIuI0ns.
395
As crlcr ndcIcd, Ihc SMEs shrch0ldcrs rc n0I lkcly I0 bc wcll
dvcrsIcd s Ihcr c0unIcrprIs n lrgc Irms. Thcy, IhcrcI0rc, sIll Icc
subsInIl unsysIcmIc rsk nd c0nscqucnIly hghcr Inncl rsk whch
s Ihc rcsulI 0I Ihc lcvcl 0I cpIl gcrng.
!n Ihc dscuss0n 0n cpIl sIrucIurc, I ws 0pncd IhI Irm mghI hvc
n 0pIml lcvcl 0I gcrng, lcvcl I whch Ihc ncrcscd rsk 0I gcrng I0
shrch0ldcrs, blnccs Ihc Ix bcncIIs I0 Ihc Irm. Ths 0pIml lcvcl s, lkcly
I0 bc l0w I0r SMEs.
Thc currcnI mrkcI prcc 0I shrc 0I lrgc qu0Icd Irm s lkcly I0
ppr0xmIc Ihc shrc's Iruc vluc, gvcn n cIIccnI sI0ck mrkcI. H0wcvcr,
Ihs sIuI0n d0cs n0I h0ld I0r Ihc shrc 0I SME. SME s ssumcd hcrc n0I
I0 bc qu0Icd 0n Ihc sI0ck mrkcI nd IhcrcI0rc Is shrc prcsumbly hs n0
prcc. Thus, 0Ihcr mcIh0ds 0I vluI0n wll bc brcIly dscusscd. Thcsc rc
dvdcnd ycld, prcccrnngs, ncI sscIs nd dsc0unIcd vluc ppr0chcs.
28.7.
Ths ppr0chcs IIcmpI I0 csIblsh Ihc vluc 0I shrc 0I n
unqu0Icd SME v Ihc mcdum 0I Ihc ycld 0I Ihc shrc 0I Is qu0Icd
c0unIcrprI. Ths ppr0ch s bscd 0n Ihc bclcI IhI Iw0 Irms whch
rc smlr n ll rcspccIs (szc, Iurn0vcr, gcrng nd dvdcnd py
0uI), cxccpI IhI 0nc s qu0Icd, sh0uld hvc Ihc smc dvdcnd ycld.
X Plc nd Y LId rc Iw0 c0mpncs smlr n szc, Iurn0vcr, gcrng
nd dvdcnd py0uI. X Plc s qu0Icd 0n Ihc SI0ck Exchngc whlc Y
LId s unqu0Icd. Thc gr0ss dvdcnd ycld I0r X Plc s 5 pcr ccnI nd Y
LId hs |usI pd nnul dvdcnds 0I 8K pcr shrc ncI. ClculIc Ihc
vluc 0I Ihc shrc.
Usng Ihc I0rmul, 0vdcnd Ycld =
And usng X Plc ycld s pr0xy I0r Y LId ycld,
Thcn, 5 = N
39b
(0.5) P
y
= 0.20
P
y
=
= .33 pcr shrc
P = Prcc
Y = Y Plc
() wIhh0ldng Ix 0I 0 s ssumcd
(b) PrcIcl pr0blcms 0I usng Ihs ppr0ch
() Thc pr0blcm 0I gcIIng qu0Icd Irm whch s smlr
n ll rcspccIs I0 Ihc unqu0Icd Irm undcr c0nsdcrI0n
() Thc cxIcnI I0 whch dvdcnds rcprcscnI Ihc sngulr
nIlucncng IcI0r n shrc prcc dcIcrmnI0n.
() Thc usc 0I hsI0rcl nI0rmI0n (psI dvdcnds lcvcl)
I0 dcIcrmnc IuIurc shrc prcc. Prccs rc m0rc lkcly
I0 bc IIccIcd by IuIurc dvdcnds rIhcr Ihn psI
dvdcnds
(v) Thc lmII0n n IrnsIcrblIy (nd IhcrcI0rc
mrkcIblIy) 0I Ihc shrc 0I Ihc unqu0Icd shrcs whch
ppcr I0 mkc Ihcm lcss vlublc.
Thc dvdcnd ycld ppr0ch s usully uscd whcn vlung mn0rIy
shrch0ldngs. Thc rcs0n s IhI Ihc mn0rIy shrch0ldcrs rcccvcs
0nly dvdcnd: hc hs n0 c0nIr0l 0vcr Ihc runnng 0I Ihc IIrs 0I Ihc
c0mpny.
28.7.2
Ths ppr0ch bclcvcs IhI Iw0 smlr Irms wll hvc Ihc smc P/E
mulIplcs
L Plc nd K LId rc Iw0 c0mpncs smlr n szc, Iurn0vcr, crnngs
nd Inncl lcvcrgc. L Plc s qu0Icd whlc K LId s unqu0Icd. Thc
P/E mulIplc I0r L Plc s 5, Ihc IIcrIx crnngs pcr shrc I0r K LId
5 =
0.20
P
y
397
hvc bccn 0.50 pcr nnum 0vcr rcccnI ycrs. ClculIc Ihc vluc 0I
cch shrc 0I K LId.
Usng Ihc I0rmul, P/E =
And usng L Plc P/E mulIplc s surr0gIc I0r K LId P/E mulIplc
Thcn, 5 =
= 7.50
N0Ic: All Ihc lmII0ns undcr dvdcnd ycld ppr0ch ls0 pply
cxccpI IhI Ihs ppr0ch s n0I IIccIcd by Ihc dvdcnd p0lcy 0I
c0mpny.
Thc P/E mulIplc ppr0ch s n0rmlly uscd whcn vlung m|0rIy
shrch0ldngs whcrc Ihc shrch0ldcr s sd I0 hvc s0mc nIlucncc
0vcr Ihc 0pcrI0ns 0I Ihc c0mpny.
Ths ppr0ch vlucs Ihc c0mpny 0n Ihc bss 0I Ihc vlucs 0I Is
ndvdul sscIs.
Thc blncc shccI 0I M LId s s I0ll0ws:
Fxcd AsscIs 55
NcI CurrcnI AsscIs 50
05
0rdnry shrcs 0I 50k cch 40
Pr0II nd L0ss cc0unIs 35
75
L0ngIcrm dcbI cpIl 30
05
398
ClculIc Ihc vluc 0I cch M LId's shrc.
P
m
=
=
= 0.9375
= 0.94 0r 94k pcr shrc ppr0x.
N0Ic: Thc b0vc c0mpuII0n s bscd 0n Ihc b00k (cc0unIng)
vlucs 0I Ihc sscIs nd lblIcs 0I M LId. !I my sccm bcIIcr
I0 usc Ihc currcnI mrkcI vlucs nd ls0 puI vluc 0n Ihc
c0mpny's g00dwll.
28.7.3
Ths ppr0ch dsc0unIs ll csImIcd IuIurc ncI csh Il0ws 0I Ihc
Irm I0 Ihcr prcscnI vluc cquvlcnIs. Ths ppr0ch s Ihc m0sI
l0gcl 0I ll, s I sIrvcs I0 rrvc I Ihc cc0n0mc vluc 0I Ihc Irm
Is Iruc 0r nIrnsc vluc. H0wcvcr, Ihcrc rc pr0blcms. Thc prncpl
0ncs rc Ihc dIIculIy n cpIurng nd csImIng ll IuIurc csh
Il0ws nd Ihc pr0blcm 0I Indng suIblc dsc0unI rIc IhI rcIlccIs
Ihc rsk 0I Ihc Irm's IuIurc csh Il0ws. Ths lIcr pr0blcm cn, pcrhps,
bc s0lvcd by usng Ihc CAPM, uIlzng Ihc Irm's ndusIry vcrgc
bcI ( ) s pr0xy I0r Ihc Irm's bcI ( ).
0vdcnd p0lccs 0I SMEs rc n0I IundmcnIlly dIIcrcnI Ir0m Ih0sc 0I lrgc
c0mpncs. Thc m|0r dIIcrcncc s Ihc clcnIclc cIIccI. 0rccI0rs 0I SMEs
sh0uld hvc kn0wlcdgc 0I Ihcr shrch0ldcrs' prcIcrcnccs nd Ihc kn0wlcdgc
sh0uld nIlucncc Ihc Irm's dvdcnd p0lcy. Thus, Ihc drccI0rs sh0uld IcI0r,
lm0sI I ll Imcs, Ihcsc prcIcrcnccs nI0 Ihcr dvdcnd dccs0ns. Ths s
bccusc shrch0ldcrs my n0I bc blc, n prcIcc, I0 scll Ihcr shrcs nd
buy Ih0sc 0I Ihc c0mpny IhI sIsIcs Ihcr dvdcnd dcsrcs.
Thc prIculr chrcIcrsIcs 0I SMEs n rclI0n I0 Ihcr nvcsImcnI nd
Inncng dccs0ns hvc bccn dscusscd. Thcsc dccs0ns, sh0uld bc mdc,
lkc n lrgc Irms, gnsI Ihc bckdr0p 0I Ihc sIrIcgc 0b|ccIvcs 0I Ihc
399
SME. Thcsc sIrIcgc 0b|ccIvcs, s n lrgc Irm, sh0uld bc Ihc SME's
Inncl 0b|ccIvcs. !n Iypcl SME, h0wcvcr, Ihcsc Inncl 0b|ccIvcs
sh0uld rcIlccI m0rc Ihc nccds nd dcsrcs 0I ndvdul shrch0ldcrs Ihn s
Ihc sIuI0n n lrgc Irm. AlIh0ugh, shrch0ldcrs wclIh mxmsI0n s
sIll rclcvnI IcI0r n SME I s n0I lkcly I0 bc hcvly wcghIcd 0b|ccIvc.
whcn mngcrs 0I SMEs pprsc cpIl nvcsImcnIs, Ihcy, pr0bbly bccusc
0I Ihcr lcvcl 0I pr0Icss0nl sklls, nvrbly usc nc0rrccI buI uns0phsIcIcd
pprsl mcIh0ds such s pybck pcr0d nd cc0unIng rIc 0I rcIurn.
Thcy sh0uld nsIcd, s much s p0ssblc, usc Ihc 0CF mcIh0ds such s NP\
nd !RR.
whcn pr0|ccIs rc bcng cvluIcd undcr unccrInIy h0w wll rsk bc bulI
nI0 Ihc cvluI0n pr0ccss! As shrch0ldcrs 0I SMEs rc ssumcd I0 h0ld
ncIIccnI p0rII0l0s (nd IhcrcI0rc Icc I0Il rsk), CAPMdcrvcd dsc0unI
rIc cnn0I bc uscd. Mngcrs 0I SMEs w0uld IhcrcI0rc bc cxpccIcd I0 Iurn
I0 such dcvccs s scnsIvIy nlyss, ccrInIy cquvlcnI mcIh0d nd w0rsI
p0ssblc, bcsIp0ssblc ppr0ch: Als0, I0r Ihc smc rcs0n 0I n0I bcng wcll
dvcrsIcd, mngcrs 0I SMEs sh0uld s much s p0ssblc dvcrsIy Ihc
0pcrI0ns 0I Ihc Irm I0r Ihc purp0sc 0I rsk rcducI0n.
\rIully, cvcry pcrs0n 0r gr0up pprccIcs Ihc mp0rIncc 0I SMEs I0 Ihc
Ngcrn cc0n0my. Thcr Inncng pr0blcms hd l0ng IIrcIcd Ihc IIcnI0n
0I ll pcrs0ns IhI rc c0nccrncd wIh Ihcr gr0wIh nd p0IcnIls. Thc s0urccs
0I Inncc vlblc I0 SMEs hvc IhcrcI0rc bccn dcnIIcd. H0wcvcr, Ihc
pr0blcm ppcrs I0 bc lcss 0I s0urccs nd m0rc 0I cccssblIy 0I SMEs I0
cpIl. \r0us cuscs 0I SMEs nblIy I0 cccss cpIl hvc bccn
hghlghIcd nd Ihcsc cn bc Irccd I0 Ihc bnks, Ihc vcnIurc cpIlsIs, Ihc
SMEs Ihcmsclvcs nd Ihc g0vcrnmcnI. Thc prncpl cuscs mghI bc sd I0
bc, m0ng 0Ihcrs, c0sIs, lck 0I c0llIcrl, nI0rmI0n nd c0mmuncI0n
gp, bscncc 0I mngcmcnI cxpcrIsc, Icr 0I dluI0n 0I c0nIr0l, sh0rI
Icrmsm 0n Ihc prI 0I Ihc bnks nd lck 0I nIrsIrucIurc 0n Ihc prI 0I
g0vcrnmcnI. Prcv0us cI0n by g0vcrnmcnI nd prvIc nsIIuI0ns I0 lgn
Ihcm wIh lrgc c0mpncs hd n0I bccn quIc succcssIul. 0cspIc Ihc IcI
IhI m0sI SMEs rc unqu0Icd, Ihcrc s sIll nccd I0 vluc Ihcm. Thcrc rc
scvcrl ppr0chcs I0 vlung SME. Ech ppr0ch, n prcIcc, ppcrs I0
pr0ducc dIIcrcnI vluc.
Ths s bccusc vlung n unqu0Icd Irm nv0lvcs l0I 0I vluc |udgmcnI.
Thc Inl Igurc I0 bc Ikcn s lkcly, IhcrcI0rc, I0 bc sub|ccI 0I ncg0II0n
nd c0mpr0msc m0ng Ihc sIkch0ldcrs. Thc 0pIml lcvcl 0I Inncl
lcvcrgc I0r Ihc SMEs s cxpccIcd I0 bc l0w whcrc Ix bcncIIs 0I Ihc SMEs
rc l0w c0mprcd, wIh Ihc ncrcscd rsk 0I lcvcrgc I0 shrch0ldcrs.
400
Thc dvdcnd p0lcy 0I SME s m0rc lkcly I0 bc m0rc n Iunc wIh Ihc
prcIcrcnccs 0I Ihc ndvdul shrch0ldcrs Ihn wll bc Ihc sIuI0n n
lrgc c0mpny.
28.0
28.0.
. A Plc nd Plc rc Iw0 Irms smlr n ll rcspccIs cxccpI IhI A Plc s
qu0Icd nd Plc s unqu0Icd. Thc P/E rI0 0I A Plc s 5, Ihc IIcrIx
crnngs pcr shrc I0r Plc hvc bccn N0.50 pcr nnum n rcccnI ycrs.
ClculIc Ihc vluc 0I cch shrc 0I Plc
A 30.00
7.50
C 5.00
0 25.00
E 20.00
2. Thc m0sI mp0rInI s0urcc 0I Inncc I0r ncw, cxpndng nd
cnIrcprcncurl c0mpny s:
A EquIy CpIl
L0n CpIl
C C0nvcrIblc dcbcnIurc cpIl
0 \cnIurc CpIl
E PrcIcrcncc Shrc cpIl
3. !n Ihc c0nIcxI 0I dvdcnd p0lcy, 0nc m|0r dIIcrcncc bcIwccn smll
Irm nd lrgc Irm s ___________
A Szc
Fnncl sgnllng
C ClcnIclc cIIccIs.
0 !nI0rmI0n c0nIcnIs 0I dvdcnd
E 0vdcnd pymcnIs.
4. Thc Inncl nIcrmcdrcs rcccnIly csIblshcd I0 spccIclly cIcr
I0r Ihc nIcrcsIs 0I smll Irms rc Ihc ________________
A C0mmcrcl bnks
Ngcrn bnks I0r c0mmcrcc nd ndusIry
C Mcr0Inncc bnks
0 McrchnI bnks
E Ngcrn !ndusIrl nk.
5. Thc g0vcrnmcnI gcncy csIblshcd I0 Ikc crc 0I Ihc nIcrcsIs 0I smll
Irms s
A Smll nd Mcdum EnIcrprscs 0cvcl0pmcnI Agcncy (SME0AN)
SccurIcs nd Exchngc C0mmss0n (SEC)
C Ngcrn SI0ck Exchngc (NSE)
0 Smll nd Mcdum !ndusIrcs EquIy !nvcsImcnI Schcmc (SM!E!S)
E Ngcrn 0cp0sI !nsurncc C0rp0rI0n (N0!C)
40
28.0.2
. !n Ihc c0nIcxI 0I dvcrsIcI0n SIIc 0NE rcs0n why smll Irm w0uld
wnI I0 usc hghcr dsc0unI rIc Ihn bg Irm n dsc0unIng IuIurc
prcIx csh Il0ws!
2. !n Ihc vluI0n 0I Ihc unqu0Icd shrcs 0I smll Irms, whI pr0blcm
rscs whcn Ihc prcccrnngs rI0 0I smlr buI qu0Icd c0mpny s
uscd s pr0xy!
3. SIIc 0NE mn IcI0r IhI dIIcrcnIIcs cquIy cpIl Ir0m vcnIurc
cpIl.
4. n Ihc c0nIcxI 0I Ihc 5cs 0I lcndng (lcndng gudclncs I0r c0mmcrcl
bnks), whI prIculr pr0blcm d0 smll Irms Icc n 0bInng l0ns
Ir0m c0mmcrcl bnks!
5. 0vcn Ihc lcvcl 0I s0phsIcI0n 0I smll Irms' mngcrs, whch cshIl0w
nvcsImcnI pprsl Icchnquc w0uld y0u dvsc I0r usc!
402
403
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ Expln I0rcgn cxchngc Irdng nd qu0II0ns,
+ 0cscrbc rbIrgc cIvIy 0I Ihc I0rcgn cxchngc mrkcI,
+ Expln Ihc Icrm "prIy c0ndI0ns" nd Ihcr uscIulncss n csImIng IuIurc
cxchngc rIcs,
+ McnI0n nd cxpln Ihc m|0r nIcrnI0nl rsks,
+ SIIc nd cxpln Ihc mn Iypcs 0I I0rcgn cxchngc rsks,
+ Expln Ihc mplcI0n 0I I0rcgn cxchngc rsks I0r Inncl mngcmcnI,
+ Expln h0w I0rcgn cxchngc rsk c0uld bc mngcd,
+ McnI0n nd brcIly cxpln Ihc vr0us dcvccs I0r hcdgng I0rcgn cxchngc
rsks, nd
+ Kn0w Ihc rclcvnI nIcrnI0nl Inncng nsIIuI0ns IhI c0uld bc 0I sssIncc
I0 Ihc Inncl mngcrs.
Thc Inncl mngcrs 0I c0mpncs rc ncrcsngly bcng nv0lvcd n Ihc
cvcnIs hppcnng n Ihc gl0bl Inncl mrkcIs. Thc nvcsImcnI nd
Inncng dccs0ns rc c0nInully bcng mdc n n nIcrnI0nl
cnvr0nmcnI. Thcy, IhcrcI0rc, nccd I0 bc c0nccrncd wIh whI s g0ng 0n n
Ihc I0rcgn cxchngc mrkcI nd m0rc mp0rInIly Ihc rsks ss0cIcd wIh
nIcrnI0nl cpIl nvcsImcnIs nd Inncng. Thc nIcrnI0nl rsks IhI
rc unquc I0 Inncl mngcmcnI rc mnly I0rcgn rsk nd p0lIcl
rsks. Thcsc rsks hvc mplcI0ns I0r cpIl budgcIng, c0sI 0I cpIl,
ssucs 0I dcbI nd cquIy, w0rkng cpIl mngcmcnI nd s0 0n. A Inncl
mngcr musI bc blc I0 nIcpIc Ih0sc rsks IhI prIculrly IIccI Ihc
c0mpny's 0pcrI0ns, qunIIy Ihcm nd usc ppr0prIc currcncy nd 0Ihcr
hcdgcs I0 mnmsc Ihc c0mpny's cxp0surc I0 Ihcm.
Ths s Irdng n 0nc c0unIry's currcncy I0r IhI 0I n0Ihcr n 0rdcr I0
Ikc crc 0I IrnscI0ns b0rdcrng 0n purchsc nd slc 0I g00ds
404
nIcrnI0nlly, nvcsImcnI n sccurIcs, I0ursm, IrnsIcr 0I Iunds
Ir0m 0nc c0unIry I0 n0Ihcr, nIcrnI0nl cpIl nvcsImcnIs nd
Inncng 0I such cpIl nvcsImcnIs. Trdng Ikcs plcc n mrkcI
kn0wn s I0rcgn cxchngc mrkcI. Ths mrkcI c0mprscs lrgc
c0mmcrcl bnks whch c0uld bc I0und n wcll kn0wn Inncl
ccnIrcs such s Ncw Y0rk, L0nd0n, T0ky0 nd Lg0s. Thc knds 0I m0ncy
IhI rc Irdcd rc bnk dcp0sIs 0r IrnsIcrs 0I dcp0sIs dcn0mnIcd
n I0rcgn currcncy. Thcrc rc I0ur scgmcnIcd I0rcgn cxchngc
mrkcIs n Ngcr Ihc 0IIcl mrkcI, Ihc nIcrbnk mrkcI, Ihc
prllcl mrkcI nd Ihc blck mrkcI.
Thc cxchngc rIc s Ihc prcc 0I 0nc currcncy n Icrms 0I n0Ihcr, IhI
s, Ihc numbcr 0I unIs 0I 0nc currcncy IhI c0uld bc b0ughI wIh 0nc
unI 0I n0Ihcr currcncy. Plcsc n0Ic IhI 'prcc' rcIcrs I0 Ihc prcc 0I
Ihc I0rcgn currcncy IhI s bcng s0ld. Thcrc rc Iw0 mcIh0ds 0I
qu0Ing wIh Ihc mcIh0d uscd vryng Ir0m c0unIry I0 c0unIry. Thc
Iw0 mcIh0ds rc drccI nd ndrccI.
() Ths s Ihc numbcr 0I unIs 0I Ihc d0mcsIc
currcncy IhI wll bc cxchngcd I0r 0nc unI 0I I0rcgn
currcncy. An cxmplc 0I drccI qu0Ic s bcIwccn Nr nd
US d0llr whcrc 50 cn bc cxchngcd I0r $, usully
cxprcsscd s 50/$ nd dcscrbcd s Ihc nr prcc 0I
d0llr. Ngcr's I0rcgn cxchngc sysIcm uscs Ihs mcIh0d.
(b) Ths s Ihc numbcr 0I unIs 0I I0rcgn currcncy
IhI wll bc Irdcd I0r unI 0I Ihc d0mcsIc currcncy. !n L0nd0n,
I0r cxmplc, Ihc cxchngc rIc qu0II0n bcIwccn p0unds nd
d0llr s n0rmlly cxprcsscd s s0 much d0llrs pcr unI 0I
p0unds IhI s $.b8 pcr _ nd cxprcsscd s Ihc d0llr prcc
0I _ ($.b8/_). Ths s n cxmplc 0I ndrccI qu0Ic nd s
ls0 kn0wn s rcvcrsc qu0Ic. !I s csly 0bIncd by |usI
nvcrIng Ihc numcrI0r nd Ihc dcn0mnI0r I0r cxmplc
50/$ rccpr0cl s /50=0.00b7. Ths mcns $0.00b7wll
cxchngc I0r .00.
Thcrc rc Iw0 Iypcs nd . Thc sp0I rIc s
Ihc rIc, s grccd n0w, I0r cxchngng 0nc currcncy I0r n0Ihcr I0r
mmcdIc dclvcry.
Thc I0rwrd rIc s Ihc rIc, s grccd n0w, I0r cxchngng 0nc currcncy
I0r n0Ihcr I spccIcd IuIurc dIc.
405
nks n0rmlly dsply Ihcr buyng rIcs nd Ihcr scllng rIcs. Thc
l0wcr prccs rc Ihcr buyng rIcs whlc Ihc hghcr prccs rc Ihcr
scllng rIcs. Thc dIIcrcncc bcIwccn Ihc scllng rIc nd Ihc buyng
rIc s kn0wn s Ihc 'sprcd.' Thc sprcd n ny currcncy wll dcpcnd
0n Ihc currcncy Irdcr, Ihc currcncy IhI s bcng Irdcd nd Ihc Irdng
bnk's gcncrl vcw 0I Ihc c0ndI0ns 0pcrIng n Ihc I0rcgn cxchngc
mrkcI I Ihc p0nI n Imc.
RIcs rc qu0Icd 0n dly bss. A hyp0IhcIcl Iblc 0I Iypcl 0nc
dy Ngcrn I0rcgn cxchngc mrkcI qu0Ics s sh0wn bcl0w:
d ( /$)* 0IIcr ( /$)*
Sp0I Ixng 33.000 33.4000
Tcn0r F0rwrd Ixng ( /$) Swp p0nIs (RIcs)( /$)
30dys 34.7/35.047 .b/.b47
b0dys 3b.373/3b.b245 3.273/3.2245
90dys 37.98b/38.2295 4.88b/4.8295
80dys 42.b93b/42.052 9.593b/9.b52
*Thc bd prcc s Ihc dclcr's/buyng prcc whlc Ihc 0IIcr prcc s Is
scllng prcc.
AlIh0ugh, Ihc Ihc0rcIcl sprcd s 0.3, n prcIcc, Ihc sprcd IhI s
n0rmlly 0bIncd n Ihc mrkcI I0r m|0r Irdcd currcnccs s usully
lcss Ihn 0ncIcnIh 0I 0nc pcrccnI (IhI s 0nc pcr mllc). 0n Ihc b0vc
Irdng dy, Ihc cIul sprcd mghI bc b0uI 0.0023.
!n 0rdcr I0 0bIn I0rwrd rIc I0r prIculr Icn0r dd 0r subIrcI
Ihc swp rIc I0 Ihc sp0I rIc dcpcndng 0n Ihc drccI0n 0I cxchngc
(up 0r d0wn). Thus Ihc swp rIc s Ihc dIIcrcncc bcIwccn Ihc I0rwrd
rIc nd Ihc sp0I rIc.
Thc m|0r currcnccs 0I Ihc w0rld wIh Ihcr nIcrnI0nl currcncy
symb0ls nd Ihcr nIcrnI0nl sIndrd c0dcs (!S0) rc sIIcd bcl0w:
40b
*N0I rclly m|0r
**Nr s, prcscnIly, n0I Irccly Irdcd currcncy.
Exchngc rIc qu0II0ns rc vlblc I0r ll c0unIrcs whcrc Ihcr
currcnccs rc Irccly Irdcd. !n c0unIrcs whcrc Ircc m0vcmcnIs 0I
currcnccs rc n0I ll0wcd, I0r cxmplc Ngcr, Ihc Fcdcrl
00vcrnmcnI n0rmlly c0nducIs ll I0rcgn cxchngc Irdng I n
0IIcl cxchngc rIc, n0IwIhsIndng Ihc c0ndI0ns currcnIly
0bInblc n Ihc mrkcI. Ngcr prcscnIly c0nducIs hcr I0rcgn
cxchngc IrnscI0n Ihr0ugh Ihc 0uIch AucI0n (RcIl) SysIcm. Ths
sysIcm cn bc chngcd by Ihc CcnIrl nk 0I Ngcr I ny Imc.
Thc I0rcgn cxchngc mrkcI s prcsumbly n cIIccnI mrkcI, IhI
s, prcc nI0rmI0n s vlblc 0n lnc n rcl Imc. Sncc currcnccs
rc h0m0gcnc0us c0mm0dIcs (d0llr s d0llr nywhcrc n Ihc w0rld)
cxchngc rIcs Icnd I0 bc cqul gl0blly. !I Ihc sIuI0n wcrc dIIcrcnI,
I mcns Ihcn IhI Ihc mrkcI s n0I cIIccnI nd rbIrgc cIIccncy
wll I0rcc Ihc rIc I0 bc cqul w0rldwdc. whI s rbIrgc n Ihc
c0nIcxI 0I currcncy IrnscI0ns! ArbIrgc s n cIvIy whch cxsIs
whcrc Iw0 sscIs, smlr n ll rcspccIs, rc bcng Irdcd I dIIcrcnI
prccs n dIIcrcnI l0cI0ns. !n Ihc c0nIcxI 0I currcncy Irdng, I rcIcrs
I0 Ihc prcIcc 0I buyng currcncy n Ihc mrkcI whcrc Ihc prcc s
l0w nd smulInc0usly scllng I n Ihc mrkcI whcrc Ihc prcc s
hgh wIh vcw I0 mkng sh0rIIcrm pr0II. As rbIrgc s g0ng
0n, Ihc l0wcr prcc s bcng pushcd up wIh buyng cIvIy whlc Ihc
hghcr prcc s bcng pullcd d0wn by Ihc scllng cIvIy, unIl Ihc
cxchngc rIcs n Ihc dIIcrcnI l0cI0ns rc s0 cl0sc IhI Ihc ddI0nl
c0sIs 0I d0ng ny IurIhcr buyng nd scllng wll 0uIwcgh Ihc
ddI0nl pr0IIs I0 bc 0bIncd. AI Ihs p0nI, Ihc cxchngc rIcs rc
sd I0 bc "IrnscI0n c0sI cl0sc" nd Ihc rbIrgc cIvIy cnds.
Supp0sc, I0r cxmplc, UnIcd nk I0r AIrc n Lg0s s qu0Ing Ihc
Nr/Us d0llr cxchngc rIc I0r 33.00033.4000 nd
!nIcrnI0nl nk 0I Ncw Y0rk s qu0Ing 32.200032.5000. Assumc
407
IhI Nr s Irccly Irdcd currcncy. Thc sIuI0n crcIcs n rbIrgc
0pp0rIunIy. !I mcns n rbIrgc c0uld buy $0,000 I !nIcrnI0nl
nk 0IIcr prcc 0I 32.5000 nd smulInc0usly scll Ihc $0,000 I0
UnIcd nk 0I AIrc I Is bd prcc 0I 33.000. Thc slcs pr0cccds
wll bc ,33,000 whlc c0sI wll bc ,325,000 wIh I0Il rbIrgc
mrgn 0I b,000 0r 0.b0 pcr d0llr. !I Ihs Iypc 0I mrgn 0pp0rIunIy
wcrc crcIcd, Ihc dcmnd I0 purchsc d0llrs Ir0m !nIcrnI0nl bnk
w0uld mkc I rsc Is 0IIcr prcc b0vc 32.5000 whlc Ihc drvc I0
scll d0llrs I0 UnIcd nk I0r AIrc wll mkc I I0 rcducc Is bd.
ArbIrgc cIvIy Ihr0ugh Ihs pr0ccss, pushcs Ihc prccs 0I dIIcrcnI
dclcrs I0 lcvcls whcrc Ihcrc w0uld bc n0 m0rc rbIrgc mrgn.
Thc bd0IIcr sprcd s Ihc 0nly IrnscI0n c0sI n Ihc wh0lcslc
bnkng I0rcgn cxchngc mrkcI. ThcrcI0rc whcn Ihc qu0Ics 0I Iw0
dIIcrcnI bnks rc dIIcrcnI by 0nly Ihc sprcd IhI ws qu0Icd n Ihc
mrkcI by Ihcsc Iw0 bnks, Ihcn, Ihcrc s 0pp0rIunIy I0 mkc rbIrgc
pr0II. Usng Ihc b0vc cxmplc, ssumc s rcsulI 0I rbIrgc
cIvIy, UnIcd bnk I0r AIrc's ncw qu0Ic s 33.005033.3050 nd
IhI 0I !nIcrnI0nl bnk 0I Ncw Y0rk s 32.705033.0050.
Thc sIuI0n n0w s such IhI rbIrgc pr0II s clmnIcd. Thc 0IIcr
prcc 0I !nIcrnI0nl bnk Ncw Y0rk whch s 33.0050 s cqul I0 Ihc
bd prcc 0I UnIcd nk I0r AIrc. Thc dIIcrcncc bcIwccn Ihc bd
nd Ihc 0IIcr prcc 0I cch bnk s Ihc smc. Thc sprcd n cch csc
s 0.30. Thcrc s n0 m0rc 0pp0rIunIy I0r rbIrgc.
Ths s n rbIrgc nv0lvng m0rc Ihn Iw0 currcnccs. nks qu0Ic
I0rcgn cxchngc rIcs n Icrms 0I d0llrs, Ihc d0llr s IhcrcI0rc
rcIcrrcd I0 s Ihc "numcrrc" 0I Ihc sysIcm. Undcr Ihs sysIcm, I s
csy I0 c0mprc d0llr cxchngc rIcs I0r dIIcrcnI currcnccs. Thus I
Ihc cxchngc rIc bcIwccn Nr nd d0llr ( /$) nd IhI bcIwccn
Rnd nd d0llr (R/$) rc kn0wn Ihc cxchngc rIc bcIwccn Nr
nd Rnd ( /R) cn csly bc clculIcd. Assumc /$ s cqul I0 50
nd R/$ s cqul I0 b.2480, Ihcn /R=24.007b. Ihc ppr0ch hcrc s
Ihc usc 0I smplc lgcbr. !I /$=N50 whlc R/$=Rb.2480 Ihcn /
R= /$ dvdcd by R/$= 50b.2480=24.007b. Thc rIc bcng
c0mpuIcd hcrc s rcIcrrcd I0 s cr0ss rIc. !I I s 0bscrvcd n mrkcI
IhI 0nc 0I Ihc Ihrcc rIcs s n0I n Iunc wIh Ihc 0Ihcr Iw0 cxchngc
rIcs, Ihcrc s n rbIrgc 0pp0rIunIy. Supp0sc n Ngcr Ihc /$ s
49.50 nsIcd 0I 50. Thcn sklIul Irdcr n Ihc I0rcgn cxchngc
mrkcI w0uld n0Icc Ihs nd spccdly m0vc n. Thc Irdcr c0uld bcgn
by purchsng $0,000 I 49.50 IhI s usc up ,495,000. Hc
408
pr0cccds I0 usc Ihc d0llrs I0 purchsc Rnd I b.2480R pcr d0llr
gvng 0uI b2480R. Thc b2480R c0uld Ihcn bc uscd n Lg0s I0 buy
Nr I N/R 0I 24.007b I0 gvc ppr0xmIcly ,500,000. Thc nIl
m0unI 0I ,495,000 hs ycldcd ,500,0000 wIh n rbIrgc
mrgn 5,000 cxcludng IrnscI0n c0sIs, whch sh0uld bc dcducIcd
I0 gcI Ihc Iruc rbIrgc pr0II. Agn, g00d Ihng b0uI Ihc rbIrgc
cIvIy s Is cIIccncy (rbIrgc cIIccncy) whch cnsurcs IhI Ihc
cxchngc rIcs g0 bck I0 Ihcr 0rgnl nIcrnI0nl cqulbrum
lcvcls. !I nIlly I ws Ih0ughI IhI Ihc Nr prcc 0I d0llr I
49.50 ws I00 l0w (undcrprccd) n Ngcr Ihcn Ihc scllng 0I Nr
I0r d0llrs by Ihc rbIrgcrs wll bc cxpccIcd I0 mkc d0llrs m0rc
cxpcnsvc nd pr0bbly pushng up Ihc prcc bck I0 50.
Thc csscncc 0I kn0wng Ihc cr0ss rIc lcs n Ihc IcI IhI whcrc Ihcrc
s lmIcd Irdng n Iw0 currcnccs, I0r cxmplc bcIwccn Nr nd
Rnd, Ihc cIvc currcncy sy Ihc d0llr c0uld bc uscd I0 w0rk 0uI Ihc
cxchngc rIc bcIwccn Ihcsc Iw0 rclIvcly ncIvc currcnccs.
Thc r0lc 0I I0rcgn cxchngc mrkcI rbIrgc n cnsurng IhI Ihc prcc 0I
I0rcgn currcncy (I0rcgn cxchngc rIc) rcmns Ihc smc n dIIcrcnI
mrkcIs hs |usI bccn dscusscd. Ths Iypc 0I rbIrgc cIvIy s n0I d0nc n
I0rcgn cxchngc mrkcI l0nc. !I s cxpccIcd IhI I w0uld 0ccur n ny mrkcI
whcrc smlr Icms rc Irdcd n dIIcrcnI l0cI0ns Ihc g00ds mrkcI, Ihc
Inncl sscIs (sccurIcs) mrkcIs nd s0 0n.
Thc Icndcncy I0r smlr Icms I0 scll I0r Ihc smc prccs w0rldwdc pr0vdcs
s0mc lnkgcs bcIwccn ccrIn cc0n0mc vrblcs nd cxchngc rIcs. Thcsc
lnkgcs 0r rclI0nshps rc rcIcrrcd I0 s prIy c0ndI0ns.
Thcsc rc rclI0nshps m0ng p0IcnIl dcIcrmnnIs 0I I0rcgn cxchngc
rIcs nd ls0 Ihc rclI0nshp bcIwccn sp0I nd I0rwrd cxchngc rIcs
whch IIcmpI I0 cxpln Ihc l0ngrun chngcs n cxchngc rIcs. Such
rclI0nshps cxsI bcIwccn prccs 0I g00ds nd cxchngc rIcs (bs0luIc
purchsng p0wcr prIy), bcIwccn rclIvc nIlI0n rIcs nd cxchngc rIcs
(rclIvc purchsng p0wcr prIy), bcIwccn rclIvc nIcrcsI rIcs nd
nIlI0n rIcs (nIcrnI0nl Fshcr cIIccI) nd dIIcrcnIl bcIwccn I0rwrd
cxchngc rIcs nd sp0I cxchngc rIcs (nIcrcsI rIc prIy). All Ihc b0vc
rclI0nshps IIcmpI I0 cxpln why cxchngc rIcs vry 0vcr Imc.
409
29.3.
Ths s Ihc0ry whch IIcmpIs I0 pr0vdc lnk bcIwccn prccs 0I
g00ds gl0blly nd cxchngc rIcs. !I sIIcs IhI chngcs n cxchngc
rIcs 0vcr Imc c0uld bc Irccd I0 chngcs n Ihc prccs 0I smlr
g00ds pr0duccd nd s0ld nIcrnI0nlly. Thc p0sI0n 0I PPP s IhI
n dcnIcl g00ds 0r scrvcc sh0uld, sub|ccI I0 Irnsp0rII0n c0sIs
nd ny 0Ihcr rcsIrcI0ns, scll I Ihc smc prcc w0rldwdc rcgrdlcss
0I whcrc I s pr0duccd. Ths s rcIcrrcd I0 s Ihc lw 0I 0nc prcc. Ths
lw s Ihc bss 0I Ihc PPP. !I, cc0rdng I0 PPP, Ihc prcc sy n 0nc
mrkcI/c0unIry chngcs rclIvc I0 Ihc 0Ihcr mrkcI/c0unIry, Ihc
cxchngc rIc bcIwccn Ihc Iw0 mrkcIs (c0unIrcs) sh0uld d|usI I0
0IIscI such chngc. S0 Ihc Iw0 prccs, mcsurcd n c0mm0n currcncy
rcmn Ihc smc.
29.3.2
!n Is bs0luIc I0rm, Ihc PPP l00ks I Ihc cxchngc rIc s Ihc rI0 0I
gcncrl prcc lcvcls bcIwccn c0unIrcs. Assumng Iw0 c0unIrcs,
Ngcr nd US, Ihc PPP pr0p0sI0n c0uld bc cxprcsscd by Ihc
I0ll0wng cquI0n.
P =S x P
$
whcrc P s Ihc prcc ndcx n Ngcr
P
$
s Ihc US prcc ndcx
S s Ihc sp0I rIc
!I Ihs cquI0n (whch s Ihc lw 0I 0nc prcc) s rcwrIIcn Ihcn
P /P
$
=S
Ths mcns IhI Ihc cxchngc rIc bcIwccn ny Iw0 currcnccs (sy
Nr nd US d0llr) s cqul I0 Ihc rI0 0I Ihcr prcc ndccs.
29.3.3
!I Ihc lw 0I 0nc prcc s Iruc Ihc PPP cxchngc rIc cn bc clculIcd
Ir0m Ihc c0mprs0n 0I Ihc prccs 0I dcnIcl g00ds dcn0mnIcd n
dIIcrcnI currcnccs ssumng mrkcI cIIccncy. Thc mplcd PPP
cxchngc rIc cn Ihcn bc c0mprcd wIh Ihc cIul mrkcI rIc I0
scc whcIhcr Ihc rclcvnI currcncy s Irdng I mrkcI rIc IhI s
cl0sc I0 Ihc mplcd rIc.
40
29.3.4
Ths s n0Ihcr vcw 0I PPP nd s c0nccrncd wIh rclI0nshp bcIwccn
cxpccIcd nIlI0n rIcs nd cxchngc rIcs. Thc rclIvc PPP cn bc
cxprcsscd by Ihc I0ll0wng cquI0n:
whcrc s Ihc cxpccIcd nIlI0n rIc (0r pcrccnIgc chngc
n prcc ndcx) n c0unIry X
s Ihc cxpccIcd nIlI0n rIc (0r pcrccnIgc chngc
n prcc ndcx) n c0unIry Y
S
I
s Ihc cxpccIcd sp0I rIc I Imc T
S
0
s Ihc sp0I rIc I0dy
Assumc IhI c0unIry X s Ihc d0mcsIc c0unIry nd c0unIry Y s Ihc
I0rcgn c0unIry. Thc rclIvc PPP sys IhI I nIlI0n rIc n c0unIry
X s cxpccIcd I0 bc hghcr Ihn cxpccIcd nIlI0n rIc n c0unIry Y,
Ihcn Ihc vluc 0I Ihc currcncy 0I c0unIry X s cxpccIcd I0 dcprccIc n
rclI0n I0 Ihc currcncy 0I c0unIry Y. Thc cxchngc rIc wll d|usI n
Iv0ur 0I c0unIry Y. An0Ihcr wy 0I sIIng Ihc rclIvc PPP s I0 sy
IhI Ihc cxpccIcd nIlI0n dIIcrcnIl (dIIcrcncc bcIwccn nIlI0n
rIcs) bcIwccn Iw0 c0unIrcs s cqul n cqulbrum, I0 Ihc cxpccIcd
m0vcmcnI n sp0I rIcs.
N0Ic: Ihs I0rmul cn smply bc ppr0xmIcly sIIcd s:
Supp0sc Ihc cxpccIcd nIlI0n n Ihc ncxI 2 m0nIhs n Ngcr s
0 whlc cxpccIcd nIlI0n rIc n US n Ihc ncxI 2 m0nIhs s b. !I
Ihc sp0I rIc n0w s 50 I0 $, whI s Ihc cxpccIcd sp0I rIc 0I
cxchngc I Imc T(ST)!
Applyng Ihc I0rmul
4
IhI s 0.00.0b =
50 (0.00.b0) = S
I
50
50 (0.04) = S
I
50
b+50 = S
I
5b = S
I
Thc cxpccIcd IuIurc sp0I rIc n 2 m0nIhs Imc wll, n cqulbrum,
bc 5b I0 $.
29.3.5
Thc nIcrcsI rIc prIy sys IhI nIcrcsI rIcs dIIcrcnIl bcIwccn
Iw0 c0unIrcs s cqul n cqulbrum I0 Ihc dIIcrcnIl bcIwccn Ihc
I0rwrd cxchngc rIc nd Ihc sp0I cxchngc rIc. !I cn bc cxprcsscd
Ihc0rcIclly s:
whcrc x s Ihc currcnI nIcrcsI rIc n c0unIry X.
nd y s Ihc currcnI nIcrcsI rIc n c0unIry Y.
F
0
s Ihc currcnI I0rwrd rIc 0I cxchngc bcIwccn Ihc Iw0 currcnccs
S
0
s Ihc currcnI sp0I rIc bcIwccn Ihc Iw0 currcnccs
Thc currcncy 0I Ihc c0unIry wIh l0wcr rIc 0I nIcrcsI wll scll I
prcmum n Ihc I0rwrd mrkcI gnsI Ihc currcncy wIh Ihc hghcr
nIcrcsI rIc.
N0Ic: Ihc b0vc I0rmul cn smply bc ppr0xmIcd s
Thc I0ll0wng nIcrcsI rIcs rc 0bscrvcd.
!nIcrcsI rIc n Ngcr ( ) 5
!nIcrcsI rIc n U.K () 0
Assumc S= 200 IhI s 200 I0 cxchngc I0r . whI s Ihc I0rwrd
rIc F
0
!
42
Usng Ihc I0rmul
0.5 0 =
0.05 =
200 (0.05) = F
0
200
0 = F
0
200
0 + 200 = F
0
F
0
= 20
A 2m0nIh I0rwrd rIc 0I N20 w0uld bc cxpccIcd I0 gvc 2
m0nIh I0rwrd prcmum cqul I0 Ihc 0.05 nIcrcsI dIIcrcnIl. Supp0sc
Ihc cIul I0rwrd rIc s N25, whI wll Ihc pr0IIscckng rbIrgcrs
d0! uy p0unds, nd mmcdIcly scll Ihc p0unds I0rwrd I0r Nr
bccusc Ihc IuIurc prcc 0I p0unds (N25) s hghcr Ihn IhI mplcd
(N20) by nIcrcsI rIc prIy. Thcsc cI0ns w0uld Icnd I0 ncrcsc
Ihc sp0I rIc S
0
nd l0wcr Ihc I0rwrd rIc F
0
unIl Ihc I0rwrd prcmum
s br0ughI bck n lnc wIh Ihc nIcrcsI dIIcrcnIl. Thc nIcrcsI rIcs
c0uld ls0 m0vc, m0vcmcnI 0I Iunds nI0 p0und nvcsImcnIs wll
dcprcss Ihc p0und nIcrcsI rIc whcrcs Ihc m0vcmcnI 0uI 0I Nr
nvcsImcnIs w0uld Icnd I0 rsc Ihc Nr rIc.
29.3.b
Thcsc rc Ihc cxpccII0ns 0I I0rcgn cxchngc dclcrs wIh rcspccI
I0 IuIurc drccI0n 0I s0mc cc0n0mc vrblcs such s nIcrcsI rIcs,
nIlI0n, budgcI dcIcI, I0rcgn Irdc nd s0 0n. Thc sscssmcnI by
Ihc mrkcI, 0I c0unIry's IuIurc rcgrdng Ihcsc cc0n0mc ndccs,
wll IIccI Ihc buyng nd scllng 0I Ihc currcncy 0I IhI c0unIry. !n
vcw 0I Ihc pr0blcm 0I I0rccsIng, Ihc I0rwrd rIc qu0Icd I0dy n
Ihc mrkcI s usully Ikcn s Ihc bcsI csImIc 0I IuIurc sp0I rIc.
Thc cxpccII0n Ihc0ry sIIcs IhI Ihc pcrccnIgc dIIcrcncc I ny
p0nI n Imc bcIwccn Ihc I0rwrd rIc nd Ihc sp0I rIc s cqul n
cqulbrum I0 Ihc cxpccIcd pcrccnIgc chngc n Ihc sp0I rIc. !I s
rcprcscnIcd by Ihc I0ll0wng cquI0n.
43
whcrc F
0
s Ihc I0rwrd rIc qu0Icd I0dy
S
0
s Ihc sp0I rIc n0w
S
I
s Ihc cxpccIcd IuIurc sp0I rIc
Thcsc rc rsks IhI rc unquc I0 Ih0sc c0mpncs wh0sc cc0n0mc cIvIcs
cxIcnd bcy0nd Ihc b0rdcrs 0I Ihc c0unIrcs n whch Ihcy rc nc0rp0rIcd.
Thcrc rc Iw0 m|0r cIcg0rcs 0I such rsks. Thcsc rc I0rcgn cxchngc rsk
nd p0lIcl rsks:
29.4.
F0rcgn cxchngc rsks rc rsks rsng Ir0m uncxpccIcd chngc n
cxchngc rIc. Thcrc rc Ihrcc mn IypcsIrnscI0n cxp0surc (rsk),
IrnslI0n cxp0surc nd cc0n0mc cxp0surc.
()
Ths Iypc 0I rsk 0r cxp0surc rscs Ir0m unccrInIy b0uI Ihc
IuIurc d0mcsIc (Nr) vluc 0I IrnscI0n whch s
dcn0mnIcd n I0rcgn currcncy nd I0 bc scIIlcd I IuIurc
dIc. Ths rsk IIccIs mnly mp0rI nd cxp0rI IrnscI0ns
buI my ls0 IIccI Ihc cc0n0mc vluc 0I Ihc Irm I0 s0mc cxIcnI.
Ths s bccusc 0I Ihc mpcI 0I uncxpccIcd chngcs n cxchngc
rIc 0n Ihc pr0IIblIy 0I IuIurc IrnscI0ns.
(b)
Ths rsk, ls0 kn0wn s , s Ihc rsk
rsng Ir0m Ihc nccd I0 c0nvcrI, I Ihc cnd 0I Ihc Inncl
ycr, I0rcgncurrcncy dcn0mnIcd sscIs nd lblIcs 0I
subsdry nI0 Ihc prcnI's c0mpny currcncy. !I s Ihc rsk 0I
hvng I0 rcp0rI l0ss (0r gn) bccusc 0I Ihc rulcs IhI rc
uscd n mkng such c0nvcrs0ns.
(c)
Ths s Ihc rsk 0I chngcs n Ihc vluc 0I Ihc Irm rsng Ir0m
Ihc uncxpccIcd chngc n Ihc cxchngc rIc. Ec0n0mc cxp0surc
I0cuscs 0n Ihc prcscnI vlucs (n rcl d0mcsIc currcncy) 0I Ihc
l0ngIcrm csh Il0ws nd h0w Ihcsc rc scnsIvc I0 chngcs n
cxchngc rIc. Ths s Ihc m0sI mp0rInI 0I Ihc Ihrcc s I hs
drccI cIIccI 0n Ihc vluc 0I Ihc Irm.
44
29.4.2
Thc mplcI0ns rc ndcIcd s I0ll0ws:
()
Thc I0rcgn cxchngc rsk prcmum dds I0 Ihc dsc0unI rIc
I0r Ihc pr0|ccI. Ths prcmum s ncccssry bccusc 0I Ihc cIIccI
0I Ihc cc0n0mc cxp0surc mpcI 0n csImIcd csh Il0ws
nd rcmIIncc 0I pr0IIs, nIcrcsIs nd cpIl.
(b)
Ths c0uld g0 up s rcsulI 0I ncrcscd rsk pcrccpI0n 0I Ihc
MNF by Ihc prcnI c0mpny.
(c)
!nIcrnI0nl nvcsI0rs w0uld rcqurc I0rcgn cxchngc rsk
prcmum whcrc Ihc MNF s l0cIcd n c0unIry wIh hghly
v0lIlc currcncy.
(d)
F0rcgn cxchngc rsk mghI l0wcr Ihc 0pIml dcbI cquIy
rI0 s I mghI ncrcsc Ihc rsk 0I Ihc c0mpny s pcrccvcd
by lcndcrs.
(c)
MNFs IhI rc scI up n c0unIrcs wIh hghly v0lIlc currcnccs
w0uld py I0rcgn cxchngc rsk prcmum I0 nIcrnI0nl
nvcsI0rs.
(I)
Thc mpcI 0I I0rcgn cxchngc rsk 0n m0vcmcnI 0I Iunds
mkcs Ihs spccI 0I Inncl mngcmcnI m0rc dIIculI I0
hndlc.
29.4.3
Thcsc rc rsk rsng Ir0m uncxpccIcd p0lIcl cvcnIs cuscd by
g0vcrnmcnI cI0n. Thcsc p0lIcl cvcnIs mghI Ikc ny 0I Ihc
I0ll0wng I0rms:
() Excrcsc 0I c0nIr0l 0vcr IrnsIcrprcng mcchnsm 0I Ihc gr0up.
(b) 0scrmnI0ry IxI0n 0I I0rcgn0wncd subsdry c0mpncs'
pr0IIs.
45
(c) RcsIrcI0n 0n Ihc rghI I0 rcmI pr0cccds 0I nIcrcsI, dvdcnds
nd s0 0n.
(d) 0cIIng Ihc shrch0ldng pIIcrn such IhI Ihc nI0nls
prIcpIc cIIccIvcly.
(c) Chngcs n g0vcrnmcnI p0lccs IhI crcIc dvcrsc cIIccIs 0n
0pcrI0ns 0I ll I0rcgn0wncd subsdry c0mpncs.
(I) Tkc 0vcr 0I MNF c0mplcIcly wIh 0r wIh0uI c0mpcnsI0n
(cxpr0prI0n).
(g) RcsIrcI0n 0n cmpl0ymcnI 0I n0nnI0nls.
(h) P0lIcl nIcrIcrcncc by I0rcgn g0vcrnmcnIs.
() 00l dvcrgcncc shrp vrnccs bcIwccn 0b|ccIvcs 0I
g0vcrnmcnI nd 0b|ccIvcs 0I Ihc I0rcgn0wncd subsdry
c0mpncs.
(|) C0rrupI0n wy 0I lIc n mny c0unIrcs wIh Ngcr, s 0I
n0w, n0I bcng n cxccpI0n.
P0lIcl rsks rc mcr0 rsks, IhI s, rsks IhI IIccI ll Ihc
subsdry c0mpncs (I0rcgn0wncd) nd n0I 0nc subsdry. Thus
Ihc ssuc 0I Ihcr mplcI0ns I0r Inncl mngcmcnI s n0I rclly
rclcvnI.
Fnncl mngcrs 0I mulInI0nl Irm cn, nd d0 mngc I0rcgn
cxchngc rIc rsk Ihr0ugh whI s cllcd "hcdgng". Hcdgng, n Ihc c0nIcxI
0I I0rcgn cxchngc rsk mngcmcnI, smply mcns scckng pr0IccI0n
gnsI uncxpccIcd IuIurc chngcs n cxchngc rIc. Ths mplcs, Ir0m Ihc
vcwp0nI 0I Inncl mngcrs 0I MNF, nIcpIng Ihc rsk, rcc0gnzng
I, qunIIyng I nd Ikng ppr0prIc cI0n I0 rcducc, I n0I, I0Illy
clmnIc such rsk. Thcrc rc numbcr 0I wys 0I d0ng Ihs. Thcsc cn bc
br0dly dvdcd nI0 nIcrnl hcdgng nd cxIcrnl hcdgng. H0wcvcr Ihcrc
s whI s Icrmcd 'nIurl' hcdgng IIcr whch hcdgng, n pr0cIvc scnsc,
sIrIs. Hcdgng cn, IhcrcI0rc, bc cIcg0rscd s I0ll0ws:
() NIurl Hcdgng
(b) !nIcrnl Hcdgng
() Csh mngcmcnI, nd
() Ad|usImcnIs 0n m0vcmcnIs 0I Iunds wIhn Ihc gr0up.
4b
(c) ExIcrnl hcdgng
() !nIcrnI0nl Inncng, nd
() Currcncy hcdgng.
29.5.
Thc nIurc 0I Ihc busncss 0I Irm nd IhcrcI0rc Ihc prcng 0I Is
csh nIl0ws (rcvcnucs) nd Is csh 0uIIl0ws (c0sIs) dcIcrmncs Ihc
cxIcnI I0 whch I s nIurlly pr0IccIcd gnsI uncxpccIcd cxchngc
rIc IlucIuI0ns. !I b0Ih Is csh nIl0ws nd csh 0uIIl0ws rc cIhcr
gl0blly prccd 0r d0mcsIclly prccd, Ihcrc s lIIlc cxp0surc I0
uncxpccIcd chngcs n cxchngc rIc. !I, 0n Ihc 0Ihcr hnd, Ihc Irm's
csh nIl0ws rc gl0blly prccd whlc Is csh 0uIIl0ws rc
d0mcsIclly prccd (nd vcc vcrs), I Iccs p0ssblc rsk 0I
IlucIuI0ns n cxchngc rsk. Thc mp0rInI p0nI s IhI I s Ihr0ugh
sIrIcgc dccs0ns wIh rcspccI I0 mrkcIs, prcng, 0pcrIng nd
s0urcng I0r rw mIcrls IhI c0mpny c0uld rcducc Is nIurl
cxchngc rIc rsk. Thc Inncl mngcr s 0nly c0nccrncd wIh Ihc
m0unI 0I rsk rcmnng IIcr nIurl hcdgng. !I s Ihs rcmnng
rsk hc w0uld Ikc pr0cIvc sIcps I0 rcducc Ihr0ugh b0Ih nIcrnl
nd cxIcrnl hcdgng.
29.5.2
()
!I Irm kncw IhI Ihc currcncy 0I Ihc c0unIry n whch Is
subsdry ws l0cIcd wcrc g0ng I0 dcprccIc I c0uld Ikc
Ihc I0ll0wng cI0ns:
() Mnmsc Is csh rcscrvc by c0nvcrIng prI 0I Ihs nI0
sI0cks nd physcl sscIs.
() !nv0cc g00ds n Ihc d0mcsIc currcncy
() CuI d0wn Irdc crcdI gvcn I0 cusI0mcrs
(v) Spccdly c0nvcrI dcbI0rs nI0 csh
(v) 0cpcndng 0n nIcrcsI rIcs, b0rr0w n l0cl currcncy 0I
Ihc c0unIry whcrc Ihc subsdry s l0cIcd I0 rcplcc
m0ncy crlcr dvnccd by Ihc prcnI c0mpny.
!I I wcrc n0I p0ssblc I0 prcdcI Ihc drccI0n 0I Ihc m0vcmcnI
0I cxchngc rIc, mIch m0ncIry sscIs wIh m0ncIry
47
lblIcs such IhI p0ssblc cxchngc rIc l0sscs rc 0IIscI by
cxchngc rIc gns.
(b)
Thc c0mpny c0uld d0 whI s rcIcrrcd I0 s nd
'lggng' n rclI0n I0 rcmIInccs 0I Iunds bcIwccn
subsdrcs n dIIcrcnI l0cI0ns.
'Lcdng' mcns spccdng up Ihc Imng 0I pymcnIs 0r rcccpIs
n I0rcgn currcnccs nd mcns dclyng s much s
p0ssblc Ihc Imng 0I pymcnIs 0r rcccpIs n I0rcgn currcnccs.
Supp0sc, US bscd Irm hs subsdrcs n Ngcr nd S0uIh
AIrc nd Ihc rcs0nng s IhI Nr s g0ng I0 hvc upwrd
rcvluI0n buI Ihc Rnd wll bc sIcdy, Ihc Ngcrn subsdry
sclls r0ughly $200,000 w0rIh 0I g00ds I0 Ihc S0uIh AIrcn
subsdry cch m0nIh, Ihc n0rml crcdI pcr0d s 3 m0nIhs
IIcr dclvcry, Ihc US prcnI c0mpny c0uld chngc Ihs crcdI
Icrms nd sk Ihc S0uIh AIrcn subsdry I0 lcd by pyng
mmcdIcly.
As prI 0I d|usImcnIs wIhn Ihc gr0up, Inncl subsdry
c0uld bc scI up n IxIrcndly c0unIrcs. Undcr Ihs
rrngcmcnI, n cxp0rIng subsdry w0uld scll g00ds I0 Ihc
Inncl subsdry whch rcsclls Ihcm I0 Ihc ulImIc buycr.
Ths s bcng d0nc, s Ix v0dncc sIrIcgy, bccusc Ihc
l0cI0n whcrc rcvcnuc s crncd s mp0rInI I0r Ihc purp0sc
0I IxI0n.
Hcrc, Ihc Inncl subsdry s nv0ccd n Ihc scllng unI's
d0mcsIc currcncy whch n Iurn rcnv0cc n Ihc buyng unI's
d0mcsIc currcncy. y Ihs, Ihc Inncl subsdry cn Ihcn
mngc ccnIrlly ll nIr Irm IrnscI0ns' rsk.
!n ddI0n I0 Ihc b0vc, nIr Irm pymcnIs (such s dvdcnds,
nIcrcsI nd r0ylIcs) IrnsIcr prcng nd ncIIng
rrngcmcnIs rc crrcd 0uI n such wy s I0 chcvc Ihc
Irm's 0vcrll Ix mngcmcnI 0b|ccIvc.
29.5.3
()
!I c0mpny s g0ng I0 bc dvcrscly IIccIcd by dcprccI0n
0I Ihc currcncy 0I Ihc c0unIry n whch Is subsdry s bscd,
I cn rsc l0n n IhI c0unIry I0 c0unIcr Ihs dvcrsc cIIccI.
Thcrc rc mny s0urccs 0I cxIcrnl Inncng vlblc. Thcsc
48
ncludc c0mmcrcl bnk l0ns n Ihc c0unIry whcrc Ihc
subsdry s l0cIcd, Eur0d0llr Inncng, nIcrnI0nl b0nd
Inncng nd s0 0n.
(b)
An0Ihcr wy by whch Inncl mngcrs c0uld hcdgc gnsI
uncxpccIcd chngcs n I0rcgn cxchngc rIc s I0 mkc usc 0I
vr0us dcvccs pr0vdcd by mny currcncy mrkcIs, I0r
cxmplc, Ihcy c0uld:
+ uy 0r scll I0rwrd cxchngc c0nIrcIs n Ihc I0rwrd
c0nIrcIs mrkcIs
+ uy 0r scll IuIurc c0nIrcIs n Ihc IuIurc c0nIrcIs mrkcI
+ uy 0r scll cll 0r puI currcncy 0pI0ns n Ihc currcncy
0pI0ns mrkcI
+ Arrngc I0r currcncy swps n Ihc currcncy swps
mrkcI.
()
A I0rwrd c0nIrcI s c0nIrcI I0r purchsc nd slc 0I
I0rcgn currcncy I spccIcd IuIurc dIc I Ihc
cxchngc rIc, dcIcrmncd n0w. Ths Iypc 0I c0nIrcI s
prIculrly uscIul I0r hcdgng gnsI IrnscI0n rsk.
nd qu0II0ns hvc crlcr
bccn dscusscd.
F0r cxmplc, I0rcgn currcncy sy d0llr my bc scllng
I prcmum 0r dsc0unI I0 Ihc d0mcsIc currcncy sy
Nr. !I Ihc sp0I rIc 0I /$ s 50, qu0Ic 0I 50.80
n Ihc I0rwrd c0nIrcI mrkcI ndcIcs IhI Ihc d0llr
s scllng I I0rwrd prcmum I0 Ihc Nr whcrcs
qu0Ic 0I 49.50 I0 Ihc d0llr mcns Ihc d0llr s
scllng I I0rwrd dsc0unI I0 Ihc Nr. Thc d0llr
wll buy m0rc Nr n Ihc IrsI csc (prcmum) nd
lcss Nr n Ihc scc0nd csc (dsc0unI) I0r IuIurc
dclvcry Ihn Ihcy d0 I0r currcnI dclvcry. !I sh0uld bc
n0Icd IhI I s Ihc I0rcgn currcncy IhI, s bcng b0ughI
nd s0ld.
49
K LId, Ngcrn cxp0rIcr, s cxpccIng $00,000 n Ihrcc m0nIhs Imc
I0r g00ds lrcdy dspIchcd I0 US. !I nIcnds I0 c0nvcrI Ihc d0llrs I0
Nr whcn Ihc m0ncy s rcccvcd n Ihrcc m0nIhs Imc. CurrcnIly Ihc
d0llr s scllng I0 Ihc Nr I 50/$ nd 49.50 (90 dys) n Ihc
I0rwrd c0nIrcI mrkcI.
!I K LId wshcs I0 v0d cxchngc rIc rsk, I sh0uld scll Ihc $00,000
I0rwrd 90dys. whcn I dclvcrs Ihc $00,000 90dys hcncc I wll
rcccvc 4,950,000. !I Ihc sp0I rIc sIys I 50 n 90 dys, 0I
c0ursc, K LId w0uld hvc bccn bcIIcr 0II I I hd n0I s0ld d0llrs
I0rwrd. K LId w0uld hvc pd 0.50 pcr d0llr 0r 50,000 n I0Il
I0 cnsurc Is blIy I0 c0nvcrI d0llr I0 Nr. 0n n nnulzcd bss,
Ihc c0sI 0I Ihc pr0IccI0n w0uld bc:
.35 .c (
0.50
/
50
x
3b5
/
90
)
!I sh0uld bc n0Icd IhI I Nr hs pprccIcd gnsI d0llr bcy0nd
49.50 sy 45, K LId w0uld hvc gncd by n0I wIng I0r 90
dys I0 rcccvc nd c0nvcrI d0llr. !I w0uld hvc c0llccIcd
4,500.000, n cxchngc l0ss 0I 450,000 (cxcludng 0pp0rIunIy
c0sI svngs n v0dblc IrnscI0n c0sIs).
()
Ths s sIndrdzcd c0nIrcI I0r Ihc purchsc nd slc 0I
I0rcgn currcncy whcrc dclvcry Ikcs plcc I spccIcd IuIurc
dIc I spccIc prcc. FuIurcs rc cl0scly rclIcd I0 I0rwrd
c0nIrcIs, buI Ihcy dIIcr n Ihc I0ll0wng cscs:
+ Fcw currcnccs rc b0ughI nd s0ld,
+ C0nIrcIs rc sIndrdscd, nd
+ Trdng Ikcs plcc n spccIc l0cI0ns nd n spccIcd
currcnccs ncludng I0r cxmplc, rIsh P0und,
Cndn 00llr, 1pncsc Ycn nd s0 0n.
()
Ths s c0nIrcI IhI cnIIlcs Ihc h0ldcr Ihc rghI I0 buy (cll
0pI0n) 0r scll (puI 0pI0n) gvcn m0unI 0I I0rcgn currcncy
I spccIcd prcc durng Ihc cxcrcsc pcr0d. Unlkc I0rwrd
nd IuIurc c0nIrcIs, currcncy 0pI0ns ll0w Ihc hcdgng 0I 0nly
420
0nc sdcd rsk. !I s 0nly dvcrsc currcncy m0vcmcnIs IhI cn
bc hcdgcd whcIhcr I s cll 0r puI 0pI0n. Thc h0ldcr hs Ihc
rghI buI n0I Ihc 0blgI0n I0 buy 0r scll Ihc currcncy durng
Ihc cxcrcsc pcr0d. !I Ihc rghI s n0I cxcrcscd, Ihc 0pI0n
cxprcs. Thc h0ldcr pys prcmum I0r Ihc pr0IccI0n 0IIcrcd
by n 0pI0n.
(v)
Currcncy swps IrnscI0n nv0lvcs Iw0 currcnccs nd Iw0
prIcs undcr whch cch prIy grccs I0 cxchngc dcbI
0blgI0ns dcn0mnIcd n cch prIy's c0unIry currcncy. 0nc
prIy's nIcrcsIs c0mmImcnI wll bc scIIlcd by Ihc 0Ihcr prIy.
0n rcdcmpI0n, Ihc prncpl m0unIs wll bc cxchngcd
n0rmlly I prcdcn0mnIcd cxchngc rIc. !I sh0uld bc
n0Icd IhI Ihcrc s n0 physcl cxchngc, hcrc, n IhI, Ihc 0nly
pymcnI IhI s mdc s I0r Ihc csh Il0w dIIcrcncc.
29.b.
Thc w0rld nk 0r0up c0nssIs 0I Ihrcc Inncl nsIIuI0ns. Thcsc
rc:
() Thc !nIcrnI0nl nk I0r Rcc0nsIrucI0n nd 0cvcl0pmcnI
(!R0),
(b) Thc !nIcrnI0nl 0cvcl0pmcnI Ass0cI0n (!0A), nd
(c) Thc !nIcrnI0nl Fnncc C0rp0rI0n (!FC).
Thc Ihrcc nsIIuI0ns hvc Ihc c0mm0n m 0I sssIng, dcvcl0png
c0unIrcs n rsng Ihc sIndrd 0I lvng 0I Ihcr cIzcns by pr0vdng
Iunds I0r l0ngIcrm dcvcl0pmcnIl pr0grmmcs.
Thc 0b|ccIvcs I0r scIIng up w0rld bnk ncludc Ihc I0ll0wng:
() AsssIng n Ihc rcc0nsIrucI0n nd dcvcl0pmcnI 0I Ihc
IcrrI0rcs 0I mcmbcrs, by IclIIng nvcsImcnI 0I cpIl
I0r pr0ducIvc purp0scs
(b) Pr0m0Ing l0ngrngc blnccd gr0wIh 0I !nIcrnI0nl Irdc
nd Ihc mnIcnncc 0I cqulbrum n Ihc blncc 0I pymcnIs
by cnc0urgng nIcrnI0nl nvcsImcnIs I0r Ihc dcvcl0pmcnI
0I Ihc pr0ducIvc rcs0urccs 0I mcmbcr c0unIrcs.
42
(c) Ensurng IhI Ihc m0sI urgcnI nccds rc sIsIcd IrsI by
grnIng 0r gurnIccng l0ns.
29.b..
Thc !nIcrnI0nl nk I0r Rcc0nsIrucI0n nd 0cvcl0pmcnI
(!R0) ws csIblshcd n 944, IIcr Ihc Im0us rcII0n
w00ds C0nIcrcncc. Mcmbcr nI0ns' subscrpI0ns I0rm Ihc
cpIl bsc 0I !R0.
29.b..2
Thc !nIcrnI0nl 0cvcl0pmcnI Ass0cI0n (!0A) ws
csIblshcd n 9b0 s c0nccss0nry nsIIuI0n,
spccIclly I0 pr0vdc Inncl supp0rI I0 Ihc lcss
dcvcl0pcd c0unIrcs, whch bccusc 0I dcbI scrvcng c0sIs
cnn0I b0rr0w 0n c0nvcnI0nl Icrms. Thc !0A c0uld lcnd
I0r up I0 30 I0 50 ycrs wIh up I0 0 ycrs m0rI0rum,
nd Ihc l0ns wcrc I l0w nIcrcsI rIcs.
Thc ss0cI0n s 0pcn I0 ll mcmbcrs 0I Ihc w0rld nk.
29.b..3
Thc !nIcrnI0nl Fnncc C0rp0rI0n (!FC) ws
csIblshcd n 1uly, 95b, s n IIlIc 0I Ihc w0rld nk,
I0 pr0m0Ic Ihc gr0wIh 0I pr0ducIvc nvcsImcnIs nd sssI
cnIcrprscs, whch wll c0nIrbuIc I0 Ihc cc0n0mc
dvnccmcnIs 0I Is dcvcl0png mcmbcr c0unIrcs. Thc
0b|ccIvcs 0I Ihc C0rp0rI0n rc nc0rp0rIcd nI0 Is
ArIclcs 0I AgrccmcnI.
29.b.2
29.b.2.
0urng Ihc Scc0nd w0rld wr whch hd dssIr0us
c0nscqucnccs 0n m0sI Eur0pcn c0unIrcs, m0sI 0I Ihc
ndusIrl ccnIrcs n Eur0pc wcrc dmgcd nd cxccssvc
mp0rIs nd b0rr0wngs hd I0 bc mdc I0 pr0sccuIc Ihc
wr. Ths lcd I0 pr0l0ngcd dcIcIs n Ihc blncc 0I pymcnI
cc0unIs 0I m0sI 0I Ihc c0unIrcs IIcr Ihc cnd 0I Ihc wr.
A mccIng ws hcld n rcII0nw00ds, USA n 944 I0 Ind
s0luI0ns I0 Ihc lrcdy hghlghIcd pr0blcms. AI Ihc cnd 0I
Ihc mccIng, Iw0 nsIIuI0ns cmcrgcd, Ihus:
422
() Thc !nIcrnI0nl nk I0r Rcc0nsIrucI0n nd
0cvcl0pmcnI (!R0) whch, s Ihc nmc mplcs, ws
I0 pr0vdc Iund I0r rcc0nsIrucIng Ihc cc0n0my 0I
mcmbcr c0unIrcs nd undcrIkng dcvcl0pmcnI
pr0grmmcs. Thc !R0, whcn c0mbncd wIh Is llcd
nsIIuI0ns lkc !nIcrnI0nl 0cvcl0pmcnI Ass0cI0n
(!0A), rc n0w kn0wn s Ihc w0rld nk (0r smply "Ihc
nk:").
(b) Thc !nIcrnI0nl M0ncIry Fund (Ihc !MF 0r Ihc "Fund")
ws I0 scc I0 Ihc s0luI0n 0I Ihc blncc 0I pymcnI
pr0blcms 0I mcmbcr c0unIrcs nd cnsurc sm00Ih
nIcrnI0nl pymcnI mcchnsm.
A c0unIry wllng I0 |0n 0nc 0I Ihc Iw0 0rgnzI0ns musI |0n
Ihc 0Ihcr. Thc nk's p0lccs nd cIvIcs rc gudcd by Is
chrIcr kn0wn s Ihc "ArIclcs 0I AgrccmcnI."
Thc ArIclcs 0I Ihc !MF chrIcr scI 0uI Is ms s I0ll0ws:
() Pr0m0I0n 0I nIcrnI0nl m0ncIry c00pcrI0n.
(b) Thc cxpns0n nd blnccd gr0wIh 0I nIcrnI0nl
Irdc, I0 cnsurc IhI Ihc ssucs 0I cIIccIng pymcnIs d0
n0I c0nsIIuIc n mpcdmcnI I0 Irdc.
(c) Thc pr0m0I0n 0I cxchngc rIc sIblIy.
(d) MnIcnncc 0I hgh lcvcl 0I cmpl0ymcnI nd rcl
nc0mcs wIh mcmbcr c0unIrcs, Ihr0ugh gns Ir0m
Irdc nd ncccssry sssIncc.
(c) Thc cnc0urgcmcnI 0I IrcI0nIrcc cxchngc
rrngcmcnIs by sssIng n cnsurng csy
c0nvcrIblIy 0I currcncy.
(I) Thc v0dncc 0I rcIlI0ry 0r c0mpcIIvc dcvluI0n
0I currcncy.
(g) Pr0vdng sssIncc I0 c0unIry n s0lvng Is blncc
0I pymcnI pr0blcms, I0r cxmplc, Ihr0ugh Ihc pr0vs0n
0I dvcc 0n IundmcnIl rcsIrucIurng 0I Ihc cc0n0my.
(h) RcducI0n n Ihc blncc 0I pymcnI pr0blcms.
() MnIcnncc 0I survcllncc 0vcr cxchngc rIc p0lccs.
(|) Av0dncc 0I dscrmnI0ry currcncy prcIccs (ArIclc
4, SccI0n 3).
423
(k) CrcIng rcscrvc bsc I0r mcmbcrs
(l) EsIblshmcnI 0I mulIlIcrl pymcnI sysIcm
Thc "Fund", unlkc Ihc "nk", s n0I dcvcl0pmcnI nsIIuI0n,
buI I sssIs smll nccdy c0unIrcs. !I d0cs n0I lcnd m0ncy I0r
dcvcl0pmcnIl purp0scs. Thc Fund IhcrcI0rc, d0cs n0I hvc Ihc
bcncII 0I Inncng vblc pr0grmmcs Ihr0ugh whch Is l0ns
c0uld bc rcpd. Sncc I s n0I pcrsc n 'd' nsIIuI0n nd
d0cs n0I lcnd I0r dcvcl0pmcnIl purp0scs, Is IclIcs rc
usully dIIculI I0 0bIn.
Ngcr |0ncd Ihc !MF n 9b.
29.b.2.2
Thc A0 ws csIblshcd 0n 4Ih AugusI, 9b3, wIh Is
hcdqurIcrs n Abd|n, C0Ic 0'!v0rc .
All !ndcpcndcnI AIrcn C0unIrcs rc Ircc I0 bcc0mc mcmbcrs
0I Ihc A0. Thc 0b|ccIvcs 0I csIblshng Ihc nk ncludc Ihc
nccd I0:
() Rcndcr Inncl sssIncc I0 Ihc AIrcn C0unIrcs
whch rc n nccd 0I Iunds I0 Inncc dcvcl0pmcnI
pr0|ccIs,
(b) Enc0urgc rcg0nl c00pcrI0n n Ihc rcs 0I Inncc
m0ng AIrcn c0unIrcs.
Thc IuncI0ns 0I Ihc A0 ncludc Ihc I0ll0wng:
() Thc pr0vs0n 0I sssIncc n Ihc sclccI0n nd dcIlcd
sIudcs 0I pr0|ccIs whch I nIcnds I0 Inncc.
(b) Thc pr0vs0n 0I Inncc I0r Ih0sc pr0|ccIs whch I0sIcr
AIrcn c00pcrI0n n Ihc rcs 0I nIrsIrucIurc, Irdc
nd rcg0nl dcvcl0pmcnI.
(c) UndcrIkng such cIvIcs IhI my IurIhcr Ihc
0b|ccIvcs 0I csIblshng Ihc nk.
424
Thc Inncl mngcrs 0I c0mpncs nv0lvcd n nIcrnI0nl IrnscI0ns
sh0uld bc wrc 0I Ihc 0ng0ngs n Ihc Inncl mrkcIs w0rldwdc
ncludng hvng s0mc kn0wlcdgc 0I h0w IrnscI0ns rc c0nducIcd n Ihc
I0rcgn cxchngc mrkcIs.
F0rcgn cxchngc Irdng mcns Irdng 0nc c0unIry's currcncy I0r n0Ihcr:
Thc prcc 0I 0nc currcncy n Icrms 0I Ihc 0Ihcr s cllcd Ihc cxchngc rIc.
Thcrc rc Iw0 mcIh0ds 0I qu0Ing n Ihc I0rcgn cxchngc mrkcI Ihc drccI
nd Ihc ndrccI. Thcrc rc ls0 Iw0 Iypcs 0I cxchngc rIcs 'sp0I rIc' nd
'I0rwrd rIc.'
Thcrc rc Iw0 prccs n0rmlly dsplycd by dclcr Ihc bd prcc whch s
Ihc prcc I whch I wnIs I0 buy nd Ihc 0IIcr (sk) prcc whch s Ihc prcc
I wnIs I0 scll. Thc dIIcrcncc bcIwccn Ihc bd prcc nd Ihc 0IIcr prcc s
cllcd Ihc "sprcd'.
ArbIrgc cIvIcs cnsurc cIIccncy 0I Ihc I0rcgn cxchngc mrkcI.
Currcnccs rc h0m0gcnc0us c0mm0dIcs, hcncc, Ihcy sh0uld c0mmnd 0nc
prcc gl0blly I p0nI n Imc. !I n0I, rbIrgcrs w0uld scI n nd cnsurc
Ihcrc s n 0pImum c0ndI0n. Trngulr rbIrgc nv0lvcs m0rc Ihn Iw0
currcnccs nd ll0wcd cr0ss rIc I0 bc clculIcd bcIwccn Iw0 currcnccs
whch rc n0I cIvcly Irdcd.
S0mc rclI0nshps hvc bccn 0bscrvcd bcIwccn ccrIn cc0n0mc vrblcs
nd cxchngc rIcs. Thcsc rclI0nshps Icnd I0 Ihr0w lghI 0n rcs0ns I0r
cxchngc rIc IlucIuI0ns. Thcy rc rcIcrrcd I0 s prIy c0ndI0ns nd
ncludc purchsng p0wcr prIy (PPP), !nIcrcsI rIc prIy (!RP) nd
rclI0nshp bcIwccn I0rwrd rIc nd sp0I rIc whcrc I0rwrd rIc s
cxpccIcd I0 rcIlccI whI Ihc IuIurc sp0I rIc wll bc (cxpccII0n Ihc0ry).
Thc Inncl mngcr c0nsdcrs nIcrnI0nl rsks IhI IIccI c0mpncs
cnggc n nIcrnI0nl cIvIcs. Thcrc rc Iw0 m|0r cIcg0rcs 0I such
rsks I0rcgn cxchngc rsks nd p0lIcl rsk. Thc I0rcgn cxchngc rsks
cn bc IurIhcr clssIcd nI0 IrnscI0ns rsk/ cxp0surc, IrnslI0n rsk/
cxp0surc nd cc0n0mc rsk/cxp0surc. Thc m0sI mp0rInI, Ir0m Ihc
sIndp0nI 0I Ihc Inncl mngcrs, s Ihc cc0n0mc cxp0surc. Ths rsk
mpcIs drccIly 0n Ihc shrch0ldcrs wclIh s I hs I0 d0 wIh IuIurc csh
Il0ws.
F0rcgn cxchngc rsk hs mplcI0ns I0r Ihc Inncl mngcr n Ihc rcs
0I cpIl budgcI, c0sI 0I cpIl, s0urcng I0r nIcrnI0nl Inncc, cpIl
sIrucIurc nd s0 0n.
425
P0lIcl rsks rc Ih0sc rsks rsng Ir0m uncxpccIcd p0lIcl cvcnIs cuscd
mnly by Ihc ccnIrl g0vcrnmcnI cI0n. Thc m0sI bIng 0I ll 0I Ihcm s
'cxpr0prI0n' whch mcns dcprvng Ihc 0wncrs 0I busncss 0I Ihcr
wclIh.
F0rcgn cxchngc rsk cn bc mngcd Ihr0ugh hcdgng dcvccs b0Ih
nIcrnlly nd cxIcrnlly. !nIcrnl hcdgng dcvccs ncludc csh mngcmcnI,
nd d|usImcnI 0I nIrIrm cc0unIs. ExIcrnl hcdgng ncludc Ihc uIlsI0n
0I such dcvccs s nIcrnI0nl Inncng nd currcncy mrkcI hcdgng.
!n nIcrnI0nl Inncng, Ihc Inncl mngcr my nccd Ihc Inncl
sssIncc 0I nIcrnI0nl Inncl nsIIuI0ns such s Ihc A0, !MF nd s0
0n. Thcr nIcrmcdI0n IuncI0ns rc vcry mp0rInI I0r Ihc Inncl
mngcrs 0I Irms cnggcd n cr0ssb0rdcr cIvIcs.
29.8
29.8.
. 0n Irdng dy, c0mmcrcl bnk dsplys Ihc I0ll0wng qu0Ic (Ihc
n0rml Iw0wy qu0Ics I0 bc gn0rcd) I0r Ihrccm0nIh I0rwrd c0nIrcI,
N49/$. Thc currcnI rIc 0I cxchngc s N50 I0 $. Ths mcns IhI
d0llr s scllng I _______________
A FuIurc rIc
FuIurc dsc0unI
C F0rwrd dsc0unI
0 F0rwrd prcmum
E FuIurc prcmum
2. whI s Ihc nmc gvcn I0 mrkcI I0r Irdng currcnccs m0ng bnks
I0r dclvcry n Ihc IuIurc!
A F0rcgn cxchngc mrkcI
F0rwrd dsc0unI mrkcI
C F0rwrd cxchngc mrkcI
0 Sp0I cxchngc mrkcI
E F0rwrd prcmum mrkcI.
3. Assumng Ihc cxpccIcd nIlI0n rIc n Ngcr n Ihc ncxI 2 m0nIhs s
0 pcr ccnI whlc IhI 0I US I0r smlr pcr0d s 7 pcr ccnI, whI s Ihc
ppr0xmIc cxpccIcd sp0I prcc 0I d0llr n 2 m0nIhs Imc I Ihc currcnI
cxchngc rIc s 35/$ nd Ihc purchsng p0wcr prIy (PPP) h0lds!
A 30.90
35.03
C 39.05
0 45.00
E 42.00
42b
4. C0nIrcIs I0 Irdc currcncy I0r dclvcry I IuIurc dIc n 0rgnscd
cxchngcs rc cllcd_____________
A F0rwrds
0pI0ns
C Swps
0 FuIurcs
E Hcdgcs
5. whI s Ihc nmc gvcn I0 lcgl nd Ircc I0rcgn cxchngc mrkcI IhI
cxsIs s n lIcrnIvc I0 rcgulIcd 0IIcl mrkcI!
A 0uIch AucI0n mrkcI.
lck mrkcI
C Sp0I mrkcI
0 F0rwrd mrkcI
E Prllcl mrkcI.
29.8.2
. !n rclI0n I0 I0rcgn cxchngc qu0II0ns, whI s 'sprcd'!
2. SmulInc0us purchsc nd slc 0I I0rcgn currcncy hvng Iw0 prccs
n Iw0 dIIcrcnI mrkcIs s0 s I0 mkc sh0rI Icrm pr0II s cllcd _________
3. whI s Ihc nmc gvcn I0 IhI mcr0 rsk nv0lvng sczurc 0I I0rcgn
c0mpny subsdry's sscIs wIh0uI pyng c0mpcnsI0n!
4. SIIc 0NE prcIcl wy 0I scckng pr0IccI0n gnsI p0lIcl rsk.
5. whch I0rcgn cxchngc rsk IIccIs Ihc csh Il0ws nd IhcrcI0rc Ihc
vluc 0I Ihc c0mpny!
427
AIIcr sIudyng Ihs chpIcr, rcdcrs sh0uld bc blc I0:
+ Kn0w Ihc rcs0ns I0r nvcsIng br0d,
+ EvluIc Iypcl I0rcgn cpIl pr0ducI,
+ ClculIc Ihc c0sI 0I cpIl I0r cvluIng I0rcgn cpIl nvcsImcnIs,
+ Kn0w Ihc m0Ivcs I0r s0urcng I0r Iunds br0d,
+ Expln Ihc mn s0urccs 0I I0rcgn Iunds,
+ Expln Ihc cpIl sIrucIurc IhI sh0uld bc uscd I0r clculIng Ihc c0sI 0I cpIl
0I mulInI0nl Irms (MNFs), nd
+ Expln Ihc prncplc 0I nIcrnI0nl IxI0n nd Ihc mcIh0ds I0r mnmsng
Ihc Ix lblIy 0I mulInI0nl Irm.
!nIcrnI0nl cpIl budgcIng rcIcrs I0 cvluI0n 0I pr0spccIvc w0rldwdc
cpIl nvcsImcnI wIh vcw I0 dcIcrmnng whcIhcr 0r n0I I0 nvcsI br0d
n Ihc IrsI nsIncc, n whch I0rcgn c0mpny 0r c0unIrcs I0 nvcsI nd Ihc
0pIml pr0|ccI(s) I0 undcrIkc, bscd 0n spccIcd dccs0n crIcr. CpIl
nvcsImcnI hvng nIcrnI0nl dmcns0n rc gcncrlly cllcd F0rcgn
0rccI !nvcsImcnIs (F0!s) s gnsI p0rII0l0 0I nIcrnI0nl sccurIcs.
H0wcvcr, Ihc I0cus 0I Ihs chpIcr s 0n F0!s.
A Iypcl cxmplc 0I F0! s whcn c0mpny plns I0 csIblsh subsdry
c0mpny n n0Ihcr c0unIry. Thc c0mpny undcrIkng Ihc F0! s kn0wn s
Ihc prcnI c0mpny. Thc c0unIry whcrc Ihc prcnI c0mpny s lcglly rcsdcnI
(IhI s nc0rp0rIcd) s Ihc h0mc c0unIry whlc Ihc c0unIry n whch Ihc
nvcsImcnI s Ikng plcc s rcgrdcd s Ihc h0sI c0unIry. Thc prcnI c0mpny
s cllcd mulInI0nl Irm (MNF) nd whcrc Ihcrc s hgh dcgrcc 0I
nIcrnI0nl sprcd 0I 0wncrshp nd mngcmcnI, IrnsnI0nl Irm
(TNF). A mulInI0nl Irm (MNF) cn IhcrcI0rc bc dcIncd s c0mbnI0n
0I Irms 0I vr0us nI0nlIcs lnkcd by 0wncrshp, c0nIrcIul rclI0nshps
nd mngcmcnI c0nIr0l. A crIcl dccs0n whch mulInI0nl Irm musI
Ikc s h0w Ihc nvcsImcnIs I0 bc undcrIkcn rc I0 bc Innccd. H0w sh0uld
subsdry 0I MNF rsc cxIcrnl Iunds! Sh0uld I b0rr0w n Ihc h0sI c0unIry
0r sh0uld I b0rr0w n Ihc gl0bl cpIl mrkcIs nd c0nvcrI Ihc b0rr0wcd
428
Iunds nI0 Ihc currcncy 0I Ihc h0sI c0unIry! FcI0rs IhI rc pcrIncnI I0 Ihcsc
qucsI0ns wll bc dscusscd n Ihs chpIcr. Asdc Ir0m Ihcsc Iw0 m|0r rcs
(nvcsImcnIs nd Ihcr Inncng) 0Ihcr rcs IhI sh0uld bc 0I nIcrcsI I0 Ihc
Inncl mngcrs 0I mulInI0nl Irm ncludc Ihc c0sI 0I cpIl
dcIcrmnI0n, csh mngcmcnI nd Ihc IxI0n mplcI0ns, n b0Ih Ihc
h0mc nd h0sI c0unIrcs, 0I Ihc F0!.
AlIh0ugh Ihc b0vc pr0blcm rcs ls0 IIccI Ihc purcly d0mcsIc Irms, Ihc
mulInI0nl Irms d0 Icc m0rc c0mplcx pr0blcms n IhI Ihcrc rc
ddI0nl pr0blcms rclIng I0 I0rcgn cxchngc rsk, p0lIcl rsk nd Ix
rcgulI0ns n b0Ih I0rcgn c0unIry nd I h0mc nd Ihc Inncng pln n
Ihc h0sI c0unIry.
30.2.
Thc IrsI qucsI0n s why c0mpny wnIs I0 nvcsI br0d. Thc
prmry rcs0n I0r c0mpny nvcsIng n n0Ihcr c0unIry s I0 cnblc
I 0bIn hghcr rIc 0I rcIurn Ir0m Ihc F0! Ihn I w0uld hvc
0bIncd 0n d0mcsIc nvcsImcnIs n Ihc smc rsk clss. AlIcrnIvcly,
I0 crn rcIurns n cxccss 0I Ihc n0rml rIc 0I rcIurn (bn0rml pr0IIs),
whch w0uld hvc bccn crncd 0n nvcsImcnIs I h0mc. Thc 0Ihcr
rcs0ns, whch rc sIrIcgc n nIurc, ncludc Ihc I0ll0wng:
() !ncIIccnccs n Ihc h0sI c0mpny's pr0ducIs, IcI0rs nd
sccurIcs mrkcIs. Such ncIIccnccs I Ihcy cxsI, c0uld bc
Iurncd nI0 0pp0rIunIcs by Ihc MNF. F0r cxmplc MNF c0uld
Ikc dvnIgc 0I n undcrprccd lb0ur (c0mprcd wIh Ihcr
pr0ducIvIy) by cxccuIng cpIl pr0|ccIs n lb0urnIcnsvc,
lcss dcvcl0pcd c0unIrcs.
(b) EnhnccmcnI 0I mngcmcnI cxpcrIsc 0r Icchn0l0gy.
(c) P0ssblc bcncIIs Ir0m vrI0ns n cxchngc rIcs.
(d) Tx v0dncc.
(c) P0lIcl sIcIy: EsIblshng subsdrcs n c0unIrcs IhI rc
n0I lkcly I0 sczc Ihc Irm's sscIs wIh0uI c0mpcnsI0n
(cxpr0prI0n).
(I) Pr0IccI0n 0I pr0II mrgn.
(g) 0cprvI0n 0I n0Ihcr Irm 0I ny bn0rml pr0II.
(h) 0vcrsIcI0n: 0bInng cc0n0mcs 0I sclc Ihr0ugh h0rz0nIl
0r vcrIcl mcrgcr.
429
30.2.2
Thcrc rc Iw0 sIgcs:
() 0cIcrmnc Ihc csh Il0ws I0 bc gcncrIcd, n Ihc currcncy 0I
Ihc h0sI c0unIry sscss Ihc vblIy 0I Ihc pr0II bscd 0n Ihcsc
csh Il0ws.
(b) 0cIcrmnc I Ihc csh Il0ws whch rc rcmIIcd I0 Ihc prcnI
c0mpny n Ihc h0mc c0unIry |usIIy Ihc nIl csh 0uIIl0w
Ir0m Ihc prcnI c0mpny.
!I sh0uld bc n0Icd IhI Ihc rclcvnI csh Il0ws rc Ihc rcmIIblc
Ircc csh Il0ws.
Thc b0vc rc Ihc Iw0 m|0r sIgcs. wIhn Ihcsc Iw0 sIgcs:
() SclccI Ihc pprsl mcIh0d, Ihs s usully Ihc Ad|usIcd
PrcscnI \luc (AP\) mcIh0d,
() scd 0n Ihc AP\ 0I Ihc pr0|ccI, c0sI 0I cpIl wll bc
clculIcd, nd
() Ad|usI Ihc csh Il0ws I0 rcIlccI Ihc dcgrcc 0I Inncl
lcvcrgc. Ths s d0nc by ddng I0 Ihc 0pcrI0ns Il0ws,
Ihc csh bcncIIs 0I Ihc nIcrcsI Ix shcld nd ll 0Ihcr
Inncl cIIccIs rclIng I0 Ihc nvcsImcnI.
!I sh0uld bc n0Icd IhI Ihc csh Il0ws vlblc I0 Ihc 0rdnry
shrcs (PrcnI C0mpny's !nIcrcsI) rc Ihc csh Il0ws IIcr
dcducIng Ix (n b0Ih Ihc h0mc nd Ihc h0sI c0unIrcs) nd
nIcrcsI pymcnIs 0n dcbI.
Thc I0rmul I0r AP\ s sIIcd bcl0w:
AP\ =
whcrc
! = Ihc nIl nvcsImcnI
I = Ihc ycr 0I csh Il0w
F

= Inl ycr 0I Ihc pr0|ccI

CF = csImIcd rcmIIblc 0pcrI0ns csh Il0ws n ycr I
r = dsc0unI rIc
FE = ddI0nl Inncl cIIccIs 0n csh Il0ws n ycr I
rI = dsc0unI rIc pplcd I0 FE
Thc dIIcrcnI Icrms 0I Ihc I0rmul rc n0rmlly dsc0unIcd I dIIcrcnI
rIcs I0 rcIlccI Ihcr dIIcrcnI dcgrccs 0I rsk. Thc rcmIIblc csh Il0w
sh0uld bc dsc0unIcd I Ihc ppr0prIc c0sI 0I cquIy cpIl whlc
430
Ihc I0rcgn cxchngc rsk nd p0lIcl rsk rc bcsI cc0unIcd I0r by
usng scnsIvIy nlyss.
Thc Inncl cIIccIs ncludc cpIl ll0wnccs, subsdcs, prcIcrcnIl
crcdI Icrms grnIcd by g0vcrnmcnI, Ix rcducI0n 0r Ix h0ldy
pr0vdcd s nccnIvc I0r ncurrng Ihc cpIl cxpcndIurc. Thc
Inncl cIIccIs cn bc dsc0unIcd, usng currcnI mrkcI nIcrcsI rIcs
bccusc Ihcy rc Ixcd n n0mnl Icrms 0vcr Imc.
M0lus c0l cxIrcI0rs, c0l mnng c0mpny bscd n UnIcd SIIcs
0I Amcrc, hs bccn wrdcd d0llr c0nIrcI n Ngcr I0 pply Is
ncw In rcc0vcry Icchn0l0gy I0 s0mc In mncs n Ihc N0rIhcrn prI 0I
Ihc c0unIry. Thcsc In mncs rc n0 m0rc ycldng pr0IIblc m0unIs
0I 0rc undcr IrdI0nl mnng. M0lus, csImIcs IhI Ihc c0sI 0I
csIblshng Ihc I0rcgn 0pcrI0n n Ngcr wll bc $20mll0n. Thc
pr0|ccI s cxpccIcd I0 hvc durI0n 0I Iw0 ycrs durng whch
rcmIIblc 0pcrIng csh Il0ws Ir0m Ihc ncw In cxIrcIcd wll bc
$5mll0n pcr nnum. csdcs Ihs, Ihc ncw 0pcrIng unI wll gvc
M0lus Ihc 0pp0rIunIy I0 rcpIrIc n ddI0nl $2mll0n pcr nnum
n Iunds l0ckcd up n Ngcr durng Ihc cr 0I cxchngc c0nIr0ls.
Assumc 5 pcrccnI dsc0unI rIc I0r 0pcrIng csh Il0ws nd 8 pcrccnI
I0r Iunds IhI wll n0w bc Ircc Ir0m c0nIr0ls. !gn0rc Ix nd cxchngc
rsks.
AP\ ppr0ch wll bc uscd s I0ll0ws:
( )
( )
( )
( )
2 2
08 .
2
08 .
2
05 .
5
05 .
5
20 AP\ + + + + =
= $20 + $4.3 + $3.b + $.85 + $.72
= $20 + $27.90 + $3.57
= $.47 mll0n
All Igurcs rc n $' mll0ns.
Thc d|usIcd prcscnI vluc 0I Ihc In rcc0vcry pr0|ccI s $.47mll0n
p0sIvc. Thc MNF cn c0mprc Ihs vluc wIh Ihc AP\ 0I 0Ihcr pr0|ccIs
I s cvluIng, n 0rdcr I0 dccdc whcIhcr 0r n0I I0 ncludc I n Is
cpIl cxpcndIurc pln 0I Ihc ycr.
$ $
$ $
$
43
Ths s Ihc dsc0unI rIc IhI sh0uld bc uscd n cvluIng I0rcgn pr0|ccIs.
Thc c0mplcxIy whch Ihc c0sI 0I cpIl 0I mulInI0nl Irm hs, n ddI0n
I0 Ihc dIIculIy 0I c0mpuII0ns, s sclccIng Ihc ppr0prIc c0sI 0I cpIl I0
usc: Ihc subsdry's 0vcrll c0sI 0I cpIl 0r Ihc prcnI's 0vcrll c0sI 0I cpIl.
Thc subsdry clculIcs Is 0wn 0vcrll c0sI 0I cpIl whch I uscs I0r Is
n0rml cpIl nvcsImcnIs. Thc prcnI c0mpny rcqurcs rIc 0I rcIurn
(c0sI 0I cquIy) whch s I lcsI cqul I0 Is 0pp0rIunIy c0sI 0I cpIl.
F0r mulInI0nl Irm, Ihc 0pp0rIunIy c0sI 0I cpIl wll bc Ihc gl0bl
rskIrcc rIc plus prcmum I0r rsk. Ths prcmum wll dcpcnd 0n whcrc
Ihc pr0|ccI s I0 bc cxccuIcd. !I Ihc subsdry s bscd n c0unIry wIh
vrblIy 0I csh Il0ws (rsk) smlr I0 IhI 0I Ihc h0mc c0unIry, Ihc prcmum
w0uld bc Ihc smc. H0wcvcr, I Ihc subsdry (nd Is pr0|ccI(s)) s n
dcvcl0png c0unIry, Ihc prcmum w0uld pr0bbly bc hghcr.
Thc c0sI 0I cpIl I0 usc n pprsng I0rcgn cpIl nvcsImcnI s Ihc
prcnI c0mpny's c0sI 0I cpIl. !I s Ihc c0sI 0I Is shrc 0I Ihc cquIy cpIl
IhI s rclly rclcvnI. Ths s bccusc Ihc prcnI c0mpny sccs Is
0pp0rIunIcs Ir0m Ihc gl0bl p0nI 0I vcw nd n0I n Icrms 0I Ihc h0sI c0unIry
mrkcI.
30.3.
Thcrc rc Iw0 mcIh0ds 0I buldng rsk nI0 Ihc pprsl pr0ccss.
() Hcrc, snglc prcmum wll bc
ddcd I0 Ihc 0vcrll c0sI 0I cpIl 0I Ihc gr0up. Thc szc 0I Ihc
prcmum wll bc IuncI0n 0I:
() Thc l0cI0n 0I Ihc pr0|ccI, nd
() \rblIy 0I Ihc pr0|ccI's csh Il0ws (busncss rsk).
F0r cxmplc, US c0mpny wh0sc c0sI 0I cpIl n US s 8
pcrccnI bcI0rc Ix mghI dd 5 pcrccnI prcmum I Ihc
nvcsImcnI s bscd n S0uIh AIrc nd 8 pcrccnI prcmum I
I s bscd n Ngcr. Ths s smplc buI c0nccpIully wr0ng
rskd|usIng mcIh0d.
(b) !n Ihs csc, Ihc prcnI c0mpny's c0sI 0I
cpIl wll bc prIly d|usIcd I0 mkc ll0wncc I0r Ihc
pr0|ccI's busncss rsk nd Ihc csh Il0ws wll bc prIly d|usIcd.
Thc crIcl pr0blcm hcrc, s n rrvng I Ihc qunIum 0I rsk
prcmum I0 bc ll0wcd I0r busncss rsk. N0IwIhsIndng, I
sh0uld bc n0Icd IhI Ihc rclcvnI rsk n Ihs csc s Ihc
432
sysIcmIc rsk 0I Ihc pr0|ccI s mcsurcd by Ihc pr0|ccI bcI.
Ths s Ihc rcc0mmcndcd ppr0ch n Ihc Icld 0I nIcrnI0nl
Inncc.
AIIcr n ppr0prIc c0sI 0I cpIl hd bccn dcIcrmncd, bscd
0n 0pcrI0ns csh Il0ws, ll 0Ihcr IcI0rs (Inncng cIIccIs)
sh0uld bc nc0rp0rIcd cIhcr by d|usIng Ihcr rclcvnI csh
Il0ws 0r mkng usc 0I scnsIvIy nlyss. Ths mplcs Ihc
usc 0I AP\ s crlcr dscusscd.
30.3.2
EsImIng c0sI 0I cpIl, whcIhcr n rcspccI 0I d0mcsIc pr0|ccI 0r
I0rcgn pr0|ccI, s dIIculI pr0ccss. Thc pr0ccss bcc0mcs m0rc
dIIculI whcn I0rcgn pr0|ccI s nv0lvcd. Thc pr0blcms ncludc Ihc
I0ll0wng:
() EsImIng Ihc rsk prcmum rcqurcd by Ihc cquIy mrkcI,
(b) EsImIng Ihc mcsurc 0I undvsIblc rsk,
(c) unIIyng Ihc IlucIuI0ns n cxchngc rIc, nd
(d) unIIyng Ihc cIIccI 0I p0lIcl rsk nd buldng I nI0 0nc
dsc0unI Igurc.
A m|0r mulInI0nl Irm, bscd n UK, s plnnng I0 nvcsI n 0nc
0I Ihc !ndcpcndcnI P0wcr Pr0|ccIs (!PP) n Ngcr. Thc MNF nIcnds
I0 IrnsIcr I0 Ngcr, 0nly cquIy Iunds. !I wnIs I0 usc AP\ pprsl
Icchnquc nd IhcrcI0rc rcqurcs Ihc c0sI 0I cpIl I0 usc I0r
cvluIng Ihc pr0|ccI. Thc I0ll0wng nI0rmI0n s pr0vdcd: Ihc
undvcrsIblc rsk I0r UK pr0|ccIs smlr I0 Ihc 0nc I0 bc cxccuIcd
s .2. H0wcvcr, I Ihc !PP pr0|ccI wcrc I0 bc cxccuIcd n Ngcr, Ihc
undvcrsIblc rsk w0uld bc rscd by Ihc UK mrkcI I0 .b I0 rcIlccI
Ihc spccl rsks 0I nvcsIng n Ngcr. Thc rskIrcc rIc 0I rcIurn
IhI cn bc 0bIncd by Ihc usc 0I Ihc prcnI c0mpny's Iunds s b
pcrccnI. Thc cxpccIcd rIc 0I rcIurn I0r UK cquIy nvcsI0rs n gcncrl
s b pcrccnI.
ClculIc Ihc c0sI 0I cquIy cpIl.
433
Thc CAPM I0rmul wll bc uscd, IhI s:
E(R

)= RI +

(R
m
R
I
)
E(R

)= b + .b(b b)
=b + b
=22
Ths s Ihc c0sI 0I cpIl IhI wll bc uscd I0 dsc0unI Ihc IuIurc csh
Il0ws rcmIIblc I0 Ihc prcnI c0mpny.
30.4
cI0rc g0ng nI0 vlblIy 0I Iunds, Ihc qucsI0n IhI sh0uld bc skcd s
why Irms nccd I0rcgn Iunds.
30.4.
Thc m0Ivcs rc:
() T0 sIsIy Ihc nccds 0I IrnsnI0nl Irms IhI hvc, n rcccnI
Imcs, gr0wn n numbcrs nd cIvIcs,
(b) T0 pr0vdc nIurl hcdgc I0r nIcrnI0nl sccurIcs,
(c) T0 hvc cccss I0 chcpcr s0urcc 0I Iunds,
(d) T0 sssI uscrs 0I I0rcgn cxchngc, whcrc Ihc d0mcsIc cpIl
mrkcIs rc lrcdy sIurIcd,
(c) T0 hvc b0rr0wcd Iunds n Ihc smc currcncy s sscIs vlucs,
nd
(I) T0 Ikc dvnIgc 0I IxI0n bcncIIs gvcn n 0Ihcr c0unIrcs
nd n0I vlblc n Ihc h0mc c0unIry,
30.4.2
M|0r s0urccs vlblc I0r subsdrcs ncludc:
() Thc subsdry's rcIcnI0ns plus dcprccI0n,
(b) Funds gcncrIcd nd/0r IrnsIcrrcd wIhn Ihc gr0up: cquIy
(csh nd n0ncsh), l0ns gvcn by Ihc prcnI c0mpny, l0ns
gvcn by 0Ihcr c0mpncs wIhn Ihc gr0up, lcds nd lgs
crcIcd n nIcrc0mpny m0vcmcnIs 0I Iunds,
(c) L0cl cquIy 0r/nd b0rr0wng Ir0m h0sI c0unIry, nd
(d) 0l0bl Inncl mrkcIs.
434
30.4.3
!n rclI0n I0 s0urccs 0I Iunds, 0nc pcrIncnI qucsI0n rscs: why d0
mny mulInI0nl Irms prcIcr I0 b0rr0w s much s p0ssblc n Ihc
h0sI c0unIry!
Thc I0ll0wng rcs0ns c0uld bc dvnccd:
() Av0dncc 0I l0sscs rsng Ir0m p0ssblc dcprccI0n 0I Ihc
h0sI c0unIry currcncy.
(b) Zcr0 cIIccI 0n prcnI c0mpny's csh Il0ws whcrc Iunds
gcncrIcd l0clly wcrc cn0ugh I0 scrvcc Ihc l0n nd rcpy
cpIl
(c) RcducI0n n Ihc ncgIvc cIIccIs whch p0ssblc nIurlzI0n
0I Ihc subsdry's sscIs mghI cusc.
whcrc dccs0n s I0 bc Ikcn 0n whcIhcr 0r n0I I0 b0rr0w Ir0m Ihc
h0sI c0unIry, Ihc rclcvnI c0sI s Ihc cIIccIvc c0sI 0I b0rr0wng whch
s cqul I0 Ihc nIcrcsI I0 bc pd plus 0r mnus pprccI0n 0r
dcprccI0n rcspccIvcly n Ihc cxchngc rIc bcIwccn Ihc h0sI c0unIry
nd Ihc c0unIry n whch Ihc b0rr0wng s I0 Ikc plcc.
Ths cn bc cxprcsscd by Ihc I0ll0wng cquI0ns:
EIIccIvc c0sI =nIcrcsI 0n l0n
rpprccI0n/dcprccI0n n cxchngc rIc
Ths c0sI sh0uld bc cxprcsscd n prcscnI vluc Icrms.
Assumng Ihc c0sI 0I b0rr0wng n US s 8 pcrccnI nd Nr s cxpccIcd
I0 dcprccIc gnsI Ihc US d0llr by 0 pcrccnI pcr nnum. Thc
cIIccIvc c0sI 0I scrvcng Ihc l0n Ikcn n US sh0uld bc ppr0xmIcly
8 pcrccnI. !I Ihc c0sI 0I b0rr0wng n Ngcr s lcss Ihn 8 pcrccnI,
I wll bc dvnIgc0us I0 b0rr0w n Ngcr I, I0r nsIncc, $00,000
s b0rr0wcd n US I0 csIblsh busncss n Ngcr, nIcrcsI 0I $8,000
s pd I Ihc cnd 0I cch ycr nd cpIl s rcpd I Ihc cnd 0I Ihc
scc0nd ycr. Thc US d0llrs rc c0nvcrIcd I0 Nr nd Ihc dcbI s
scrvccd n Ngcr. Thc rIc 0I cxchngc I Ihc Imc 0I Ihc l0n ws
$50 I0 $. whI s Ihc cIIccIvc c0sI 0I b0rr0wng!
435
End 0I ycr L0n !nIcrcsI L0n !nIcrcsI
0 $00,000 N5,000,000
($8,000) ,320,000
2 ($8,000) N8,50,000 ,452,000
EIIccIvc c0sI 0I scrvcng Ihc l0n s 0bIncd by s0lvng I0r r (usng
Ihc nIcrnl rIc 0I rcIurn mcIh0d) n Ihc I0ll0wng cquI0n
AI 8 NP\ =5,000,000+,8,b00+,042,800 +3,035,000
=9b,400
AI 25 NP\ =5,000,000+,05b,000+929,280
=+,bb,000
=,398,720
Thr0ugh !nIcrp0lI0n r cn bc 0bIncd s I0ll0ws:
IhI s r s |usI b0uI 8.8b
30.4.4
Ths mcns lsIng 0I Ihc subsdry c0mpny 0n Ihc l0cl sI0ck
cxchngc. Ths hs dvnIgcs nd dsdvnIgcs.
()
Thc dvnIgcs ncludc Ihc I0ll0wng:
() Thcrc s wdcr sprcd 0I 0wncrshp wIh Ihc IIcndnI
rsk rcducI0n,
43b
() !I s s0urcc 0I Iunds IhI pr0vdc n cscpc r0uIc s
buycrs 0I shrcs cn csly bc I0und I sIuI0n clls
I0r dsp0sl,
() C0nIr0ls 0n m0vcmcnI 0I csh n nd 0uI 0I Ihc h0sI
c0unIry cn bc v0dcd, nd
(d) Thc dcmnd 0n nI0rmI0n Ir0m Ihc prcnI c0mpny
cn bc rcduccd.
(b)
() As qu0Icd c0mpny, IlcxblIy n mngcmcnI,
hIhcrI0 cn|0ycd my bc rcduccd. F0r cxmplc I mghI
n0I bc csy gn I0 uIlsc IrnsIcr prcc I0r Ihc bcncII
0I Ihc gr0up.
() Thc MNF mghI l00sc s0mc c0nIr0l n dccs0n mkng.
Thc h0sI c0unIry g0vcrnmcnI mghI wnI I0 cnsurc IhI
mp0rInI dccs0ns rc mdc by Ihc subsdry nd n0I
by Ihc prcnI c0mpny.
() Thcrc mghI bc nccd I0 c0mply wIh Ihc h0sI c0unIry
sI0ck cxchngc rulcs 0n ccrIn crIcl mIIcrs, I0r
cxmplc, Ihc nIcrcsI 0I Ihc mn0rIy shrch0ldcrs
(v) whcrc subsInIl shrcs rc n0I hcld by Ihc prcnI
c0mpny, Ikc0vcr mghI 0ccur.
30.4.5
0l0bl EquIy MrkcI rcIcrs I0 nIcrnI0nl IrnscI0ns n cquIcs,
whcrc c0mpncs cr0sslsI cquIcs n numbcr 0I nI0nl mrkcIs
nd nvcsI0rs Ir0m 0nc c0unIry buy shrcs n I0rcgn mrkcIs.
Mny c0unIrcs n Ihc w0rld hvc sI0ck mrkcIs IhI rc 0pcn I0 I0rcgn
nvcsI0rs nd ls0 0pcn I0 I0rcgn c0mpncs IhI wnI I0 rsc Iunds
Ihr0ugh Ihc ssuc 0I sccurIcs n Ihc currcncy 0I Ihc d0mcsIc sI0ck
mrkcI. Thc rcs0ns I0r cr0sslsIng 0I sccurIcs ncludc Ihc I0ll0wng:
() T0 v0d |0nng lrgc qucuc whcrc ppr0vls 0n Imng 0I
c0mng I0 Ihc mrkcI hvc I0 I0ll0w s0mc prcscrbcd
pr0ccdurcs.
(b) T0 pr0vdc 0pp0rIunIcs I0r nI0nls 0I n0Ihcr c0unIry I0 buy
shrcs 0I Ihc c0mpny
(c) T0 crcIc much wdcr cpIl bsc
437
(d) T0 pr0vdc cc0mm0dI0n I0r vcry lrgc ssucs whch my n0I
bc p0ssblc n snglc d0mcsIc mrkcI
(c) T0 hclp Ihc c0mpny I0 bc kn0wn w0rldwdc
30.4.b
Thc cpIl sIrucIurc 0I c0mpny pr0vdcs n mp0rInI bsc I0r Ihc
c0mpuII0n 0I Ihc c0sI 0I cpIl. An mp0rInI p0nI s n Ihc csc 0I
MNF, whcrc Ihcrc s rgumcnI 0n whch cpIl sIrucIurc I0 usc I0r Ihc
c0mpuII0n 0I Ihc MNF c0sI 0I cpIl: IhI 0I Ihc subsdry 0r 0I Ihc
0vcrll gr0up. Thc c0nscnsus s IhI I s Ihc gr0up's cpIl sIrucIurc
IhI sh0uld bc uscd nd n0I Ihc subsdry's cpIl sIrucIurc.
Thc rcs0n s IhI, Ihc usc 0I Ihc subsdry's cpIl sIrucIurc (nd by
mplcI0n Is Inncl lcvcrgc lcvcl) mghI bc mslcdng. Thc
I0ll0wngs hvc bccn dvnccd I0 supp0rI Ihs p0sI0n.
()
Thc b0rr0wng by Ihc subsdry mghI hvc bccn hghly
subsdscd by Ihc h0sI g0vcrnmcnI s0 s I0 cnc0urgc I0rcgn
drccI nvcsImcnIs (F0!s) n Ihc c0unIry. Thus Ihc Inncl
lcvcrgc (gcrng) lcvcl mghI bc much hghcr Ihn whI s
rcgrdcd s n0rml n Ihc prcnI c0mpny's c0unIry. !n
clculIng Ihc c0sI 0I cpIl, Ihc subsdy sh0uld bc ll0wcd
I0r, by ncludng Ihc rclIcd nIcrcsI svngs n Ihc csImIcd
csh Il0ws.
(b)
Hgh lcvcl 0I dcbIs mghI hvc bccn sccurcd by prcnI
c0mpny's gurnIccs. Thcsc dcbIs hvc bccn grnIcd 0n Ihc
sIrcngIh 0I Ihc gr0up sscIs nd n0I 0n Ihc sIrcngIh 0I Ihc
subsdry's sscIs.
(c)
SubsInIl dcbIs musI hvc bccn 0bIncd v dclbcrIc
p0lcy dccs0ns 0I Ihc MNF I0 rsc Iund v b0rr0wng nsIcd
0I Ihr0ugh cquIy.
Thc MNF sh0uld bc nIcrcsIcd n gl0bl cpIl sIrucIurc nd sh0uld
Iry I0 chcvc n 0pIml sIrucIurc. !I s Ihc gl0bl cpIl sIrucIurc
IhI nIcrcsIs nvcsI0rs nd crcdI0rs n cvluIng Ihc Inncl
sIrcngIh 0I mulInI0nl Irm.
438
Fnncl mngcrs 0I mulInI0nl Irms sh0uld hvc g00d kn0wlcdgc
0I Ihc prncplcs 0I nIcrnI0nl IxI0n s0 IhI Ihcy c0uld mngc Ihcr
nIcrnI0nl cIvIcs n such wy s I0 rcducc Ix lblIy (Ix v0dncc).
30.5.
Thc dscuss0n 0I Ihc prncplcs wll ccnIrc 0n Ihc I0ll0wng p0nIs:
() TxI0n 0I pr0IIs.
(b) AprI Ir0m Ihc Ix IhI w0uld hvc bccn pd 0n subsdry's
pr0IIs, Ihcrc my bc ddI0nl Ix I0 bc pd by Ihc prcnI
c0mpny I h0mc.
(c) Thc IxI0n bsc my bc Ihc gl0bl pr0IIs 0I Ihc prcnI
c0mpny.
(d) !n ddI0n I0 Ix 0n pr0IIs, Ihcrc my bc wIhh0ldng Ix 0n
dvdcnds, nIcrcsI nd p0ssbly r0ylIcs IrnsIcrrcd 0uI 0I Ihc
c0unIry.
(c) !I s usul I0r Ihc h0mc c0unIry I0 grnI Ix crcdI I0r Ixcs
lrcdy pd 0n pr0IIs crncd n I0rcgn c0unIrcs whcrc Ihcrc
s d0ublc IxI0n grccmcnI.
(I) !n 0rdcr I0 IIrcI I0rcgn drccI nvcsImcnIs (F0!s) s0mc h0sI
c0unIrcs d0 gvc gcncr0us Ix ll0wnccs nd cvcn pr0vdc
Ix hvcns zcr0 pr0IIs Ix nd n0 wIhh0ldng Ix.
30.5...
Thc Ix rIc my bc bscd 0n Ihc rIc IhI w0uld hvc bccn
pd I Ihc pr0IIs wcrc crncd n Ihc h0mc c0unIry (d0mcsIc
ncuIrlIy) 0r I h0sI c0unIry Ix rIc (I0rcgn ncuIrlIy).
!n Ihc lIIcr csc, Ihcrc s n0 ddI0nl Ix burdcn I h0mc.
MulInI0nl Irms usully prcIcr Ihs lIIcr ppr0ch s0
s I0 bc blc I0 c0mpcIc cIIccIvcly wIh Ihcr c0unIcrprIs
n Ihc h0sI c0unIry. H0wcvcr, Ihc usul ppr0ch, n prcIcc,
s Ihc "d0mcsIc ncuIrlIy".
30.5..2
Thcsc rc nIcrnI0nl grccmcnIs bcIwccn sy Iw0
c0unIrcs whcrcby cr0ssb0rdcr IrnscI0ns lkc dvdcnds,
nd nIcrcsI rc n0I ll0wcd I0 suIIcr Ix Iwcc, Ihc prncplc
0I "I0rcgn ncuIrlIy" 0r IhI 0I "d0mcsIc ncuIrlIy". L0wcr
wIhh0ldng Ix rIcs, my ls0 bc ncludcd n Ihc IrcIcs.
439
30.5..3
F0rcgn subsdry's pr0IIs my bc Ixcd cIhcr whcn Ihcy
rc crncd 0r whcn Ihcy rc rcccvcd n Ihc h0mc c0unIry n
Ihc I0rm 0I nIcrcsI 0r dvdcnds v rcmIIncc Ir0m Ihc h0sI
c0unIry.
30.5..4
whcrc pr0IIs rc rcmIIcd I0 ss0cIcd c0mpncs IhI rc
rcgrdcd s Ix hvcns, such pr0IIs wll n0I bc sub|ccI I0
ddI0nl Ix n Ihc prcnI c0mpny's c0unIry.
30.5..5
Tx uIh0rIcs rc nIcrcsIcd n nIcrIrm IrnsIcr prccs.
Thcrc rc rulcs IhI gudc dccs0ns 0n cccpIblc IrnsIcr
prccs. Thcrc rc, I0r cxmplc, rulcs rclIng I0 dcIcrmnI0n
0I mrkcI prcc n rm's lcngIh IrnscI0ns nd 0I n0rml
pr0II mrkup.
30.5.2
!nIcrnI0nl IxI0n s 0nc 0I Ihc c0mplcx rcs 0I mulInI0nl
Inncl mngcmcnI, !I, IhcrcI0rc, rcqurcs pr0pcr mngcmcnI.
Thc mcIh0ds vlblc I0 MNF I0r mnmsng Ix lblIy ncludc
Ihc I0ll0wng:
() L0cI0ns 0I subsdrcs sh0uld bc crcIully sclccIcd. Hgh
Ix c0unIrcs sh0uld bc IrgcIcd s0 s I0 cnsurc Ihcrc rc cn0ugh
cxpcnscs I0 crcIc ncgIvc pr0IIs bcI0rc Ix.
(b) Hgh pr0IIcrnng subsdrcs, sh0uld bc l0cIcd n c0unIrcs
wIh l0w Ixcs.
(c) A purcly Inncl subsdry sh0uld bc l0cIcd n n 0vcrscs
Inncl ccnIrc. (Ix hvcn).
(d) TrnsIcr prcng p0lccs sh0uld bc such IhI l0w pr0IIs rc
rcp0rIcd s crncd n hghIx c0unIrcs nd hgh pr0IIs n
l0wIx c0unIrcs. A rccxp0rIng rrngcmcnI cn bc mdc
such IhI g00ds rc IrsI scnI I0 Ihc l0wIx c0unIry bcI0rc bcng
scnI I0 Ihc ulImIc dcsInI0n.
(c) AdvnIgc sh0uld bc Ikcn 0I Ix h0ldys nd 0Ihcr Ix
nccnIvcs pr0vdcd by s0mc c0unIrcs I0 IIrcI F0!s.
(I) 0rr0w n c0unIrcs wIh hgh Ix rIcs.
440
!nIcrnI0nl cpIl budgcIng nd Inncng rc rcs 0I Inncl
mngcmcnI IhI sh0uld bc 0I prIculr nIcrcsI I0 Inncl mngcrs 0I
mulInI0nl Irms. AlIh0ugh Ihc prncplcs rc Ihc smc, whcIhcr d0mcsIc
c0mpncs 0r mulInI0nls, Ihcrc rc ddI0nl pr0blcms whch Ihc MNFs
Icc. Thcsc ncludc I0rcgn cxchngc rsks nd Ihcr mngcmcnI, p0lIcl
rsks nd h0w I0 nc0rp0rIc Ihcm unI0 Ihc cpIl budgcIng pr0ccss, IxI0n
0I pr0IIs nd h0w I0 mnmsc Ixblc lblIy nd whI Ihc Inncng p0lcy
sh0uld bc. Thc Iypcl rcs 0I Inncl mngcmcnI IhI hvc nIcrnI0nl
dmcns0ns ncludc cpIl budgcIng, c0sI 0I cpIl, nIcrnI0nl s0urccs
0I Iunds, cpIl sIrucIurc nd nIcrnI0nl IxI0n.
Thc sIrIcgc m0Ivcs I0r nvcsIng br0d ncludc Ihc cxsIcncc 0I Ihc
ncIIccnccs n Ihc h0sI c0unIry's g00ds, IcI0rs nd sccurIcs mrkcIs,
l00kng I0r cnhnccd mngcmcnI cxpcrIsc, Ikng dvnIgc 0I vrblIy
0I cxchngc rIcs, v0dng Ix nd s0 0n.
Thc cvluI0n 0I I0rcgn cpIl nvcsImcnI cnIls Iw0 sIgcs: Ihc
dcIcrmnI0n 0I csh Il0ws nd Ihc sscssmcnI 0I Ihc vsblIy 0I Ihc pr0|ccI,
bscd 0n Ihcsc csh Il0ws nd |usIIcI0n 0I Ihc I0rcgn nvcsImcnI bscd
0n Ihc rcmIIblc csh Il0ws. Thc Ad|usIcd prcscnI vluc (AP\) Icchnquc s
n0rmlly uscd n Ihc cvluI0n pr0ccss s I s ncccssry I0 ls0 dsc0unI
ny p0ssblc Inncl cIIccIs. Thcrc s nccd I0 dcIcrmnc Ihc c0sI 0I cpIl
IhI wll bc uscd n dsc0unIng Ihc 0pcrI0ns csh Il0ws I0 Ihcr prcscnI
vlucs. Thc c0sI 0I cpIl IhI s m0sI ppr0prIc I0r cvluIng I0rcgn
pr0|ccIs s Ihc prcnI c0mpny's c0sI 0I cpIl nd n0I Ihc subsdry's c0sI
0I cpIl. Thcrc rc Iw0 mcIh0ds 0I nc0rp0rIng rsk nI0 Ihc c0sI 0I cpIl
IhI wll bc uscd, ddng snglc rsk prcmum I0 Ihc 0vcrll c0sI 0I cpIl
(wcghIcdvcrgc c0sI 0I cpIl) 0r prIly d|usIng Ihc csh Il0ws nd
ddng prcmum I0 Ikc crc 0I busncss rsk 0I Ihc pr0|ccI. Thc
rcc0mmcndcd ppr0ch s Ihc dul d|usImcnI.
Thcrc s ls0 m0Ivcs I0r s0urcng I0r Iunds br0d. Thcsc ncludc Ihc nccd
I0 sIsIy Ihc rcqurcmcnIs 0I IrnsnI0nl Irms (TNF), Ihc nccd I0 pr0vdc
nIurl hcdgc I0r nIcrnI0nl sccurIcs, Ihc nccd I0 hvc cccss I0 chcpcr
s0urcc(s) 0I Iunds nd s0 0n. Thc s0urccs 0I Iunds vlblc ncludc l0cl
cquIy .c. lsIng 0n h0sI c0unIry sI0ck mrkcI, b0rr0wng n Ihc h0sI c0unIry
nd gl0bl cquIy mrkcI. Thc cpIl sIrucIurc IhI sh0uld scrvc s bss
I0r Ihc clculI0n 0I Ihc c0sI 0I cpIl sh0uld n0I bc IhI 0I Ihc subsdry,
buI IhI 0I Ihc prcnI c0mpny. Thc mn rcs0n s Ihc p0ssblc cxsIcncc 0I
mpcrIccI0n n Ihc dcbIcquIy rclI0nshp (gcrng 0r Inncl lcvcrgc)
rsng Ir0m hghly subsdscd l0ns, gurnIccd l0ns nd p0lcy dccs0ns.
Thc nIcrnI0nl spccIs 0I Inncl mngcmcnI 0I MNF sh0uld bc 0I
44
grcI nIcrcsI I0 MNF Inncl mngcrs. Thcy nccd I0 hvc g00d
kn0wlcdgc 0I Ihc prncplcs nv0lvcd s0 s I0 bc blc I0 pply Ihc rghI
Icchnqucs IhI wll mnmsc Ihc MNF's Ix lblIy. Thc spccIc rcs 0I
nIcrcsI rc Ihc Ix bsc (Ixblc pr0IIs), Ihc Ix rIc, d0ublcIxI0n IrcIcs
nd s0 0n. Thc IcI0rs IhI wll nIlucncc Ihc cIIccIvc mngcmcnI 0I Ihc
gl0bl Ix sysIcm w0uld I0cus 0n sIrIcgc l0cI0n 0I subsdrcs,
csIblshmcnI 0I Inncl ccnIrc nd IrnsIcr prcng p0lccs. Thc ulImIc
0b|ccIvc wll bc I0 rcducc Ix lblIy.
30.7
30.7.
. !n pprsng I0rcgn nvcsImcnI whch csh Il0ws rc rclcvnI!
A Csh Il0ws gcncrIcd n Ihc h0sI c0unIry.
Csh Il0ws gcncrIcd n Ihc h0mc c0unIry
C Frcc csh Il0ws rcmIIblc I0 Ihc subsdry c0mpny by Ihc
prcnI c0mpny.
0 Frcc csh Il0ws rcmIIblc I0 Ihc prcnI c0mpny by Ihc subsdry
E Csh Il0ws rcmIIblc I0 Ihc subsdry c0mpny by Icll0w
subsdrcs.
2. whcn clculIng Ihc c0sI 0I cpIl I0 usc n pprsng I0rcgn
nvcsImcnI, whch cpIl sIrucIurc sh0uld bc uscd s bsc! CpIl
sIrucIurc 0I
A Ihc subsdry c0mpny
Ihc prcnI c0mpny l0nc
C Ihc 0vcrll gr0up
0 n0Ihcr subsdry.
E ll Ihc subsdrcs.
3. whch cpIl budgcIng Icchnquc sh0uld bc uscd n cvluIng I0rcgn
pr0|ccI!
A Pr0IIblIy !ndcx Icchnquc (P!)
!nIcrnl RIc 0I RcIurn Icchnquc (!RR)
C PrcscnI \luc Icchnquc (P\)
0 Ad|usIcd PrcscnI \luc Icchnquc (AP\)
E Und|usIcd PrcscnI \luc Icchnquc (UP\)
4. Thc nIcrnI0nl Inncl nsIIuI0n IhI s c0nccrncd wIh c0unIrcs
hvng blncc 0I pymcnIs pr0blcms s cllcd _________
A AIrcn 0cvcl0pmcnI nk (A0)
AIrcn Exp0rImp0rI nk (AFREXM)
C !nIcrnI0nl Fnncc C0rp0rI0n (!FC)
0 !nIcrnI0nl M0ncIry Fund (!MF)
E Eur0pcn CcnIrl nk (EC)
442
5. Thc currcncy 0I mcmbcrs 0I Ihc Eur0pcn Un0n (EU)s cllcd
__________________
A Eur0 d0llr
Eur0 currcncy
C Eur0
0 Eur0 mrk
E Eur0 SIcrlng
30.7.2
. whI s Ihc 0vcrrdng 0b|ccIvc 0I mulInI0nl Irm (MNF) I0r
csIblshng I0rcgn subsdry!
2. SIIc 0nc rcs0n why Ihc usc 0I Ihc subsdry's cpIl sIrucIurc my
bc mslcdng!
3. SIIc Ihc Iw0 mn sIgcs nv0lvcd n Ihc cvluI0n 0I I0rcgn cpIl
pr0|ccIs
4. whI s Ihc m|0r pr0blcm n0rmlly cnc0unIcrcd n buldng I0rcgn
cxchngc rsk nI0 Ihc c0mpuII0n 0I c0sI 0I cpIl!
5. SIIc Iw0 mn s0urccs 0I Iunds vlblc I0 I0rcgn subsdrcs.
443
445
. E
2. 0
3. C
4. 0
5. 0
. L0ngIcrm nvcsImcnI dccs0ns nd l0ngIcrm Inncng dccs0ns.
2. whcIhcr I0 dsIrbuIc pr0IIs 0r I0 rcIn pr0IIs I0r IuIurc cxpns0n.
3. Am0unI nv0lvcd s usully vcry lrgc nd dccs0ns n0rmlly g0 nI0 Ihc dsInI IuIurc
nd 0ncc mdc 0IIcn rrcIrcvblc.
4. CrcIng vluc I0r Ihc 0wncrs 0I Ihc busncss (shrch0ldcr wclIh mxmsI0n).
5. RclIng wIh 0Ihcr mngcrs n Ihc prcprI0n 0I sh0rIIcrm plns, m0nI0rng nd
c0nIr0l.
. 0
2. 0
3. C
4. 0
5. E
. chvc rcsp0nsvcly nd rcsp0nsbly by pr0vdng wclIrc IclIcs, v0dng wIcr nd
r p0lluI0n, 0l spllgc, supp0rIng sp0rI pr0grmmcs nd s0 0n.
2. !I scrvcs s Ihc bss I0r ll dccs0ns mdc n Ihc c0mpny.
3. 00l dvcrgcncc, 0r sub 0pImsI0n.
4. () McsurcmcnI pr0blcm, 0r
() N0rmIvc pr0blcm.
44b
5. () MxmsI0n 0I pr0II smply by cxpndng Ihc sclc 0I 0pcrI0n nd n0I n
rclIvc Icrms
0R
() MxmsI0n 0I pr0II c0uld bc chcvcd I Ihc cxpcnsc 0I |c0rpdsng l0ngrun
bcncIIs.
. C
2. E
3. C
4. A
5. E
. Ch0cc 0I pprsl Icchnquc such s pybck pcr0d
() !nsIcd 0I supcr0r Icchnquc such s prcscnI vluc
0R
() RcIusl I0 undcrIkc subsInIlly, bcncIcl buI hghly rsky pr0|ccIs.
2. wnd0w drcssng
3. () \grcs 0I sI0ck mrkcI prccs 0r
() SI0ck mrkcI mclId0wn.
4. wdc dspcrsl 0I shrch0ldcrs
5. Mngcrs Ikng cI0ns IhI mghI drvc d0wn Ihc prcc 0I Ihc c0mpny's shrcs.
.
2 0
3. C
4. A
5.
447
. C0rp0rIc g0vcrnncc
2. Pr0vs0n 0I bsc IclIcs, cducI0n I0r chldrcn, wrd 0I sch0lrshps, supp0rI I0r
sp0rI dcvcl0pmcnI nd s0 0n. (ny 0nc)
3. C0rp0rIc wclIh mxmsI0n (CwM)
4. Pr0m0Ics cpIl mrkcIs cIIccncy, c0mpny drccI0rs cn|0y mrkcI c0nIdcncc (ny
0nc)
5. 0IIcl c0rrupI0n
. 0
2. 0
3. 0
4.
5. A
. M0ncy mrkcI nsIrumcnIs hvc l0wcr rsk whcn c0mprcd wIh cpIl mrkcI nsIrumcnI.
2. nkcrs AcccpIncc 3 prIcs. C0mmcrcl ppcrs 2 prIcs.
3. 0Ih nc0mc nd cpIl vlucs c0uld bc cr0dcd by nIlI0n.
4. Pr vluc: \luc sIIcd n Ihc ssuc d0cumcnI.
MrkcI \luc: \luc s dcIcrmncd by nvcsI0rs n Ihc b0nd mrkcI.
5. AcI s gcnIs I0r nd 0n bchlI 0I nvcsI0rs n Ihc purchsc nd slc 0I shrcs nd sI0cks.
. C
2. C
3. A
4. C
5. 0
448
. C0rp0rIc Plnnng
2. SIrIcgc Plnnng
3. P0sIvc rcIurn
4. SIrIcgy
5. 0b|ccIvc.
. 0
2. C
3. C
4. 0
5. E
. E C0mmcrcc
2. ElccIr0nc dI nIcrchngc (E0!)
3. M!S Pr0grmmcd dccs0ns c.g. nvcnI0ry c0nIr0l
0SS Scmpr0grmmcd dccs0ns: dccs0ns 0n whcIhcr 0r n0I I0 cl0sc dcprImcnI.
4. ScmsIrucIurcd pr0blcms
5. TcIcl lcvcl.
. E
2
3. A
4. C
5. E
449
2. 500,000 (.08)
0
= 500,000 x 2.589
= ,079,4b2
Ths s IuIurc vluc 0I sum nv0lvng Ihc usc 0I I0rmulr (+r)
n
3. 895,500 = A(4.487)
A = b,84
Ths s IuIurc vluc 0I 0rdnry nnuIy pr0blcm nv0lvng Ihc usc 0I I0rmul
4. P\
/n
= 27,200 (b,70)
= 82,52
Ths s prcscnI vluc 0I 0rdnry nnuIy pr0blcm nv0lvng Ihc usc 0I I0rmul
5. Ths s Ihc pplcI0n 0I 'Rulc 72' 1usI dvdc 72 by Ihc rIc .c. 8 I0 gcI Ihc numbcr 0I
ycr
. Snkng Iund nvcsImcnI pr0grmmc
2. 29,335,000
3. AnnuIy duc (0r nnuIy n dvncc)
4. 78,b48.94
5. Fnncl dccs0ns rc b0uI prcscnI nd IuIurc csh Il0ws b0Ih 0I whch d0 n0I hvc Ihc
smc rcl vlucs. FuIurc vlucs IhcrcI0rc hvc I0 bc dsc0unIcd I0 Ihcr prcscnI vluc
cquvlcnIs bcI0rc dccs0n cn bc Ikcn. Exmplc, s cpIl nvcsImcnI dccs0ns.
2. 5m (5.8b7)
= 29,335,000
Ths s IuIurc vluc 0I nnuIy 'pr0blcm'
4. 2 = A + A
450
2 = A + A (.783)
2 = A + .783A
2 = 2.783A
A =
78.b48.94
Ths s n cxmplc 0I nnuIy duc whcrc Ihc IrsI nvcsImcnI s scprIcly dcnIIcd nd
'n' rcduccs by .
. C
2. A
3.
4. E
5. 0
3. Pybck pcr0d =
=
= 4 ycrs
5. PcrpcIuIy:
=
= 2,250,000
. Am0unI nv0lvcd s usully vcry subsInIl nd dccs0n 0ncc mdc s lm0sI lwys
rrcIrcvblc.
2. () RclIvcly csy I0 undcrsInd nd usc
() Hs lqudIy dvnIgc whch cnc0urgcs mngcrs wh0 rc sh0rIIcrmsI.
3. wr0ng prcscnI vlucs nd IhcrcI0rc dsI0rIcd dccs0ns.
4. P0sIvc NP\ dds vluc nd IhcrcI0rc cnhnccs shrch0ldcrs wclIh NcgIvc NP\
0pcrIcs n rcvcrsc.
45
5. AcccpI ll pr0|ccIs wh0sc !nIcrnl RIc 0I RcIurns rc grcIcr Ihn prcdcIcrmncd hurdlc
rIc 0r Ihc c0mpny's c0sI 0I cpIl nd vcc vcrsc.
. E
2. 0
3. C
4. 0
5. E
. Annul EquvlcnI vluc (AE\) mcIh0d 0bIncd by Ihc I0rmul NP\/ AnnuIy FcI0r.
whcrc nnuIy IcI0r rcprcscnIs prcscnI vluc 0I pcr ycr I0r 'n' ycrs @ x pcrccnI.
2. Sub|ccIvIy n Ihc ch0cc 0I I0rcsccblc IuIurc 0r Ihc InIc h0rz0n.
3. Rcl RIc =
4. RcplccmcnI
5. Hrd cpIl rI0nng: !nblIy I0 rsc Iunds bccusc 0I lmIcd s0urccs 0I supply.
S0II cpIl rI0nng: CpIl c0nsIrnI s mp0scd Ir0m wIhn pr0bbly bccusc 0I, sy,
lmIcd mngcmcnI skll.
. 0
2. A
3. E
4. C
5. 0
. !nIl nvcsImcnI vcry hgh nd c0uld sprcd 0vcr Iw0 ycrs 0r m0rc
2. Thc usc 0I unduly hgh dsc0unI rIc
3. Exmplc: P\ 0I 000 0bInblc n 5 ycrs Imc @ 2 gvcs 82.70
452
P\ 0I 000 0bInblc n 5 ycrs Imc @ 25 gvcs |usI 35.20
4. 0pImum lcvcl nlyIcl m0dcl
5. 00l c0ngrucncc: T0p mngcmcnI sh0uld cnsurc IhI ndvdul mngcrs' 0b|ccIvcs
rc lgncd, s much s p0ssblc wIh Ihc 0vcrll sIrIcgc g0l 0I Ihc c0mpny.
.
2.
3. C
4. E
5.
@2
Ycr
0 ,000,000 x .0 (,000,000) (,000,000)
700,000 x 0.8 5b0,000 500,000
2 b00,000 x 0.7 420,000 334,82
. UnccrInIy 0uIc0mcs 0I cvcnIs cnn0I bc prcdcIcd wIh ny dcgrcc 0I ccrInIy.
Rsk 0uIc0mcs 0I cvcnIs c0uld bc prcdcIcd wIh s0mc dcgrcc 0I ccrInIy nd pr0bblIcs
IIchcd.
2. A rskd|usIcd IcI0r IhI s uscd I0 c0nvcrI rsky csh Il0ws nI0 ccrInIy csh Il0ws
3. () ClculIc ndvdul NP\s nd Ir0m Ihcrc 0bIn Ihc ENP\ usng rclcvnI
pr0bblIcs.
() ClculIc Ihc cxpccIcd vluc 0I cch 0I Ihc npuIs nd usc Ihc rcsulI I0 gcI Ihc
cxpccIcd NP\ drccIly.
4. A grphc ppr0ch I0r rrngng pr0|ccI's p0ssblc sIrcms 0I csh Il0ws
5. Thc pr0ccss nv0lvcs c0llccIng smplcs Ir0m Ihc pr0bblIy dsIrbuI0ns 0I unccrIn
clcmcnIs n Iypcl csh Il0w nd c0mpuIng Ihc prcscnI vluc n cch csc.
.
2. C
453
3. C
4. 0
5.
. 37.23: 2/98 X 3b5/20
2. Thc c0mpny sh0uld n0I cccpI Ihc 0IIcrcd dsc0unI s I hs I0 b0rr0w I 40 I0 bc blc
I0 cn|0y l0wcr nIcrcsI svngs 0I 37.23.
3. C0nvcrs0n rghI s cxprcsscd n Icrms 0I c0nvcrs0n prcc 0r c0nvcrs0n rI0.
4. C0nvcrs0n vluc s Ihc mrkcI vluc 0I Ihc qunIIy 0I shrcs nI0 whch unI 0I l0n
sI0ck wll bc c0nvcrIcd. !I cn bc cxprcsscd s c0nvcrs0n rI0. X mrkcI prcc 0I Ihc
shrc I Ihc Imc 0I ssuc.
5. Exchngc rI0 s Ihc numbcr 0I shrcs whch Ihc h0ldcr 0I wrrnI s cnIIlcd I0 buy I0r
cch wrrnI.
. C
2.
3.
4.
5. E
. Zcr0 c0up0n b0nd.
2. A dcbcnIurc wh0sc nIcrcsI wll bc pd nInIcly.
3. !nIcrcsI ycld s Ihc ycld IhI wll bc 0bIncd I Ihc Ixcd nIcrcsI sccurIy wcrc n0I I0
hvc mIurIy whcrcs ycld I0 mIurIy s Ihc ycld IhI w0uld bc 0bIncd Ir0m
rcdccmblc Ixcd nIcrcsI sccurIy.
4. () 0Ih rc Ixcdnc0mc sccurIcs.
() Thcy rc b0Ih vlucd s pcrpcIul sccurIcs.
5. Thr0ugh Ihc usc 0I Ihc I0rmul
454
g =
whcrc 0
n
s Ihc dvdcnd rIc n ycr n
0

s Ihc dvdcnd rIc n ycr

n s Ihc numbcr 0I ycrs I0r whch dvdcnds hvc bccn pd
. 0
2.
3. E
4. C
5. A
. . !dcnIIy Ihc chcpcr mcIh0d 0I Inncng Ihc sscI
b. EvluIc Ihc cc0n0mc vblIy 0I Ihc pr0|ccI
Ths wrIcr 0pncs IhI Ihc ssuc 0I whch sIcp c0mcs IrsI s unscIIlcd. I Ihc IrsI sIcp
c0mcs IrsI, I hs Ihc dvnIgc 0I cccpIng pr0|ccI whch w0uld 0Ihcrwsc hvc bccn
rc|ccIcd I lcsng s chcpcr Ihn b0rr0wng. !I Ihc scc0nd sIcp c0mcs IrsI, I hs Ihc
dvnIgc 0I svng Imc nd c0sI (n prcIcc), I Ihc pr0|ccI s n0I vblc n Ihc IrsI
nsIncc. Ths mplcs IhI Ihc Inncl mngcr d0cs n0I nccd I0 b0Ihcr b0uI mcIh0d
0I Inncng I Ihc pr0|ccI s ncvcr vblc.
0nc Ihng IhI s clcr, h0wcvcr, s IhI Ihc pr0|ccI's NP\ musI bc p0sIvc 0r n Ihc lcsI,
cqul I0 zcr0.
2. 0rccI lcsng 2 prIcs (lcss0r, lcsscc)
Lcvcrgcd lcsng 3 prIcs (lcss0r, lcsscc nd Innccr)
3. !n prcIcc, lcsng s lm0sI lwys m0rc cxprcssvc Ihn b0rr0wng. (Lcsc pymcnIs
c0nIn b0Ih nIcrcsIs nd pr0IIs I0 Ihc lcss0r)
4. Csh Il0ws 0I Ihc pr0|ccI IsclI.
00mclI0n: undcrIkng Ir0m Ihc bcncIcrcs 0I Ihc pr0|ccI I0 rcmI pr0cccds drccIly
I0 Ihc bnk.
455
5 () IxdcducIblc nIcrcsI c0sI
() cpIl ll0wnccs Ix mpcI
. 0
2.
3. E
4. 0
5. C
2. .c.
= 0.07 + 0.0 = 0.7 0r 7
3. 7 CpIl SIrucIurc: EquIy 0nly.
4.
= 0.07 0r 7
. 0Ih vrblcs rc cqul. !n IcI Ihcrc rc Iw0 wys 0I l00kng I Ihc rIcs.
2 . Thc nc0mng pr0|ccI sh0uld hvc Ihc smc rsk lcvcl s Ihc cxsIng
c0mpny's pr0|ccIs.
. Fnncng 0I Ihc pr0|ccI s g0ng I0 bc n Ihc smc mx s Ihc cxsIng cpIl
sIrucIurc.
3. !nIcrnl rIc 0I rcIurn (!RR) ppr0ch.
4. !ssuc c0sIs I0 bc dcducIcd Ir0m Ihc gr0ss pr0cccds I0 rrvc I Ihc ncI pr0cccds IhI scrvc
s Ihc bsc.
5. !nIcrcsI IhI s chrgcblc 0n such Iunds.
45b
. 0
2. 0
3. A
4. E
5. 0
. 0vcrll c0sI 0I cpIl dccrcscs nd lIcr ncrcscs
2. T0Il vluc 0I Ihc Irm rcmns Ihc smc rrcspccIvc 0I Ihc Irm's cpIl sIrucIurc.
3. L0wcr
4. ulIy 0I sscIs
5. 50,000 (.c 500,000 x 0.30).
. E
2. A
3. A
4. C
5. C
. 'H0mc mdc' dvdcnd mcns shrch0ldcrs rcplcIng (rcplcng cxcIly) csh n0I
rcccvcd Ir0m Ihc c0mpny by b0rr0wng I0 sIsIy Ihcr csh dvdcnds rcqurcmcnIs.
2. 0vdcnds cnn0I bc pd 0uI 0I cpIl
3. () SIblc dvdcnd py0uI mcns pyng Ixcd m0unI pcr nnum rcgrdlcss 0I
Ihc lcvcl 0I pr0IIs.
() SIblc py0uI rI0 mplcs pyng Ixcd pcrccnIgc 0I pr0IIs vlblc I0r
dvdcnds cvcry ycr s0 IhI cIul m0unI pd wll bc IlucIuIng dcpcndng
0n Ihc lcvcl 0I pr0IIs.
4. 0vdcnds cn 0nly bc pd 0uI 0I csh. 0vdcnds rcprcscnI dsIrbuI0n 0I pr0IIs nd
n0I pymcnI 0I pr0IIs.
5. 0nus ssuc 0r CpIlsI0n 0I rcscrvcs.
457
. A
2. 0
3.
4.
5.
. Csh m0vcs drccIly I0 Ihc c0mpny Ir0m Ihc publc n 0IIcr I0r subscrpI0n whcrcs Ihc
c0mpny d0cs n0I rcccvc csh n 0IIcr I0r slc, I g0cs drccIly I0 Ihc cxsIng shrch0ldcrs.
2. PrvIc PlccmcnI
3. () Thr0ugh undcrwrIng 0I Ihc ssuc
() Usng 0IIcr by Tcndcr mcIh0d
4. PrccmpIvc rghIs
0R
Prvlcgcd SubscrpI0n
5. 0nus ssuc d0cs n0I nv0lvc '0pI0ns', whcrcs rghIs ssuc c0uld bc cccpIcd 0r rc|ccIcd
I c0sI.
. 0
2. C
3. A
4. C
5. C
. 0cmIcrlsI0n
2. Hc 0r shc ppr0chcs sI0ck br0kcr
3. () AcIvcly nv0lvcd n vcrIcI0n pr0ccss (dcmIcrlsI0n 0I 0ld shrc ccrIIcIcs
458
() SIll kccp rcc0rds 0I 0wncrshp nd IrnsIcrs lIh0ugh 0n EI0rmI bss.
() EIIccI pymcnIs 0I dvdcnds nd b0nuscs 0nlnc (Eb0nus nd Edvdcnd
mcnus).
4. 4 w0rkng dys (T + 3 w0rkng dys).
5. Hgh c0sIs 0I lsIng nd mnInng qu0II0n.
.. E
2. 0
3. C .c. ( 0.b x 0.2) + (0.4 x 0.3) = 0.2 + 0.2 = 24
4. E
5. A .c.
. Rsk nd RcIurn
2. ExpccIcd RcIurn
3. C0vrncc bcIwccn cch pr 0I sccurIcs n Ihc p0rII0l0.
4. ThI p0rII0l0 whcrc Ihc nvcsI0r's ndIIcrcncc curvc s IngcnI I0 Ihc cIIccnI Ir0nIcr.
5. P0rII0l0 Ihc0ry l00ks I I0Il rsk (sysIcmIc plus unsysIcmIc) whcrcs CAPM c0nsdcrs
0nly Ihc sysIcmIc rsk 0I Ihc sccurIy.
. E
2.
3. C
4. 0
5. C
459
. CurrcnI sscIs lcss currcnI lblIcs
2. Trdc crcdI0rs nd 0Ihcr crcdI0rs nd ccruls IhI rsc sp0nInc0usly n Ihc c0mpny's
dyI0dy 0pcrI0ns.
3. y gcIIng Ihc sum (n dys) 0I rw mIcrl c0nvcrs0n pcr0d, w0rknpr0grcss c0nvcrs0n
pcr0d, Inshcd g00ds c0nvcrs0n pcr0d nd dcbI0rs c0nvcrs0n pcr0d.
4. Lrgc m0unI 0I m0ncy s nvcsIcd n w0rkng cpIl, Ihc mngcmcnI 0I whch ls0
Ikc subsInIl m0unI 0I mngcmcnI Imc nd cII0rIs.
5. 0vcrIrdng mcns Ihc sc0pc 0I c0mpny's 0pcrI0ns (Iurn0vcr) s s0 lrgc IhI I c0uld
n0I bc supp0rIcd by Ihc currcnI lcvcl 0I w0rkng cpIl.
. C
2.
3. C
4. C
5. 0
. TrnscI0n 0r prccuI0nry 0r spcculIvc
2. RcccpIs nd dsburscmcnI pymcnIs mcIh0d
3. N0 nccd I0 kccp csh blncc, hs Ihc cIIccI 0I ncrcsng pr0IIblIy
4. Thc lcvcl whcrc h0ldng c0sIs 0I csh nd IrnscI0n c0sIs s cqul
5. Trcsury blls
. 0
2. A
3. 0
4. C
5.
4b0
. CrcdI sIndrds nd nlyss
b. CrcdI Icrms
2 . Thc vcrgc c0llccI0n pcr0d
b. Thc dcIulI rIc
3. ChrcIcr, cpcIy nd c0ndI0n
4. Ths mcns IhI Ihc supplcr hs cxIcndcd crcdI I0r 45 dys. H0wcvcr I pymcnI s
mdc wIhn 0 dys, Ihc buycr w0uld bc cnIIlcd I0 2 dsc0unI.
5. FcI0rng hclps Ihc Irm I0 svc c0sI 0I crcdI dmnsIrI0n.
. E
2. A
3. 0
4. 0
5.
.
2. = 790.b0
. 1usI n Imc (1!T)
2. Annul dcmnd
3. uIIcr sI0ck 0r sIcIy sI0ck
4. Pcr0d 0I Imc bcIwccn whcn n 0rdcr s plccd nd whcn Ihc g00ds rrvc.
5. 0pIml sI0ck qunIIy s Ihc qunIIy I whch Ihc sI0ck h0ldng c0sI s cqul I0 Ihc
sI0ck 0rdcrng c0sI.
4b
. C
2.
3. E
4. C
5. E
.
2. MrkcI prcc 0I Mcdum I 33.33 prcmum s 24 x

/
3
= 32
Exchngc rIc wll bc
32
/
b4
=

/
2
.c shrc 0I g I0r cvcry 2 shrcs 0I Mcdum
. Syncrgy
2. H0rz0nIl mcrgcr
3. Hubrs hyp0Ihcss
4. 0,85,000
5. 5,028,000
4. \luc 0I Ihc cnlrgcd M|0r Plc.
3m x 3.b05 = 0,85,000 whcrc
3,b05 s Ihc nnuIy IcI0r I0r 2 rcqurcd rIc 0I rcIurn
5. Prcmcrgcr vluc 0I
M|0r = .5m x 3.352
= 5,028,000 whcrc 3.352 s Ihc nnuIy IcI0r I0r 5 rcqurcd rIc 0I rcIurn
4b2
. C
2. 0
3. 0
4. C
5. C
. \rIul C0mpny.
2. !n SIrIcgc llnccs ndvdul prIcs kccp Ihcr lcgl nd physcl cxsIcncc.
3. !n spn0IIs, Ihcrc s n0 chngc n 0wncrshp s Ihc cxsIng shrch0ldcrs sIll 0wn IhI
prI 0I Ihc 0ld busncss IhI ws spn0II. Ths s c0nIrry I0 scll0IIs.
4. Lcvcrgcd buy0uIs rc Iypcl mngcmcnI buy0uIs whcrc Inncng 0I Ihc cqusI0n
ws d0nc by 0uIsdc Inncl gr0up.
5. Thc vluc 0I Ihc c0mpny whcn lqudIcd sh0uld bc grcIcr Ihn Ihc prcscnI vlucs 0I
sIrcm 0I IuIurc csh Il0ws whcn n0I lqudIcd.
.
2. 0
3. C
4. C
5. A
. P/E x EPS = 5 x 0.50 = 7.50
. Shrch0ldcrs 0I smll Irms rc n0I s0 dvcrsIcd s Ihcr c0unIcrprIs n bg Irms,
hcncc dsc0unI rIc rcIlccIs b0Ih sysIcmIc nd unsysIcmIc rsk
2. Pr0blcm 0I Indng n cxcIly dcnIcl c0mpny IhI s qu0Icd 0n Ihc sI0ck mrkcI.
3. \cnIurc cpIlsIs nvcsImcnIs rc n0I pcrmncnI. Thcy rc usully I0r mcdum Icrm
nd rc cxpccIcd I0 bc rclcscd, I pr0II, IIcr IhI pcr0d.
4b3
4. C0llIcrl
5. Pybck pcr0d
C
2 C
3 C
4 0
5 E
3. x y =
= 0.0 0.07 =
.c. 35(0.03) =
4.05 + 35 = F
0
.c. F
0
= 39.05
. 0IIcrcncc bcIwccn Ihc scllng rIc nd Ihc buyng rIc qu0Icd by currcncy dclcr.
2. ArbIrgc
3. Expr0prI0n
4. Tkc n nsurncc
5. Ec0n0mc cxp0surc (0r rsk).
. 0
2. C
4b4
3. 0
4. 0
5. C
. T0 crn rIc 0I rcIurn 0n Ihc I0rcgn drccI nvcsImcnI (F0!) whch s hghcr Ihn IhI
whch w0uld hvc bccn crncd by smlr pr0|ccIs I h0mc.
2. () L0n my bc subsdscd by Ihc h0sI g0vcrnmcnI
() Hgh lcvcl 0I b0rr0wngs mghI hvc bccn mdc p0ssblc by Ihc gurnIcc pr0
vdcd by Ihc prcnI c0mpny.
() P0lcy dccs0n my bc I0 b0rr0w s much s p0ssblc n Ihc h0sI c0unIry nsIcd
0I Inncng v cquIy (ny 0nc 0I Ihc b0vc)
3. () EvluIc Ihc csh Il0ws 0I Ihc pr0|ccI n Ihc h0sI c0unIry
() EvluIc Ihc csh Il0ws rcmIIblc I0 Ihc h0mc c0unIry
4. 0cIcrmnng Ihc I0rcgn cxchngc rsk prcmum
5. () Funds IrnsIcrrcd wIhn Ihc gr0up: cquIy nd l0n
() Funds gcncrIcd by Ihc subsdry: rcIcnI0ns
() Funds Ir0m 0uIsdc Ihc gr0up c.g. b0rr0wng
4b5
K Plc nd 1 Plc rc qu0Icd c0mpncs. Thc I0ll0wng s Ihc cxIrcI 0I Ihc blncc shccIs 0I Ihc Iw0
c0mpncs.
0rdnry shrc cpIl
AuIh0rscd 2,000,000 shrcs
0I 50k cch ,000 ,000
!ssucd nd Iully pd
,000,000 shrcs 0I 50 cch 500 500
Rcscrvcs ,750 50
Shrch0ldcrs Iunds 2,250 b50
b rrcdccmblc dcbcnIurc 2,500
Ech 0I Ihc Iw0 c0mpncs hs 0pcrIng pr0IIs 0I 500,000 nd Ihcsc rc cxpccIcd I0 rcmn
unchngcd I0r n ndcInIc IuIurc. Thc pr0IIs 0I cch 0I Ihc c0mpncs rc gcncrlly rcgrdcd
s dcnIcl n Icrm 0I rsk. !I s Ihc p0lcy 0I cch c0mpny I0 dsIrbuIc ll vlblc pr0IIs s
dvdcnd, I Ihc cnd 0I Ihc ycr. Thc currcnI mrkcI vluc 0I K Plc 0rdnry shrcs s 3 pcr shrcc
cum dv. An nnul dvdcnd s duc I0 bc pd n Ihc vcry ncr IuIurc.
1 Plc hs |usI mdc nnul dvdcnd nd nIcrcsI pymcnIs b0Ih 0n Is 0rdnry shrc nd Is
dcbcnIurcs rcspccIvcly. Thc currcnI mrkcI vluc pcr shrc 0I Ihc 0rdnry shrc s N.40 cx dv.
cch dcbcnIurc sI0ck (N0mnl 00) s w0rIh 50 n Ihc mrkcI.
ClculIc Ihc c0sI 0I cquIy cpIl I0r K Plc nd Ihc wcghIcd vcrgc c0sI 0I cpIl
(wACC) I0r 1 Plc
MrkcI prcc cx dv:
T0Il dvdcnds = 500,000
!ssucd shrcs = ,000,000
0vdcnd pcr shrc = 500,000/,000,000
= 0.50 pcr shrc
MrkcI prcc Ex dv = 3N0.50
= 2.50
C0sI 0I EquIy cpIl (K
c
) = 0.50/2.50
= 20
4bb
C0sI 0I EquIy cpIl
Pr0II IIcr Ix (ncludng nIcrcsI) 500,000
b 0cbcnIurc (nIcrcsI) (50,000)
0vdcnd pcr shrc = 0.35
Shrc prcc .40
K
c
=
=25
C0sI 0I dcbcnIurc =
= 2
CpIl SIrucIurc C0sI Hsh T0Il
0rdnry Shrc
CpIl ,400,000 25 350,000
0cbcnIurc ,250,000 2 50,000
2,b50,000 500,000
wACC = = 8.87
AlIcrnIvcly Ihs c0uld bc 0bIncd s I0ll0ws:
=
=
= 8.87
ChcI 1c|clyc, vlucd clcnI 0I y0ur sI0ck br0kcn Irm hs skcd I0r y0ur dvcc 0n hs nvcsImcnI
p0rII0l0. Hc h0lds Ihc I0ll0wng sccurIcs 0I Ihc sI0ck mrkcI (hvng Ihc lsIcd rsk chrcIcrsIcs
sh0wn bcl0w.
X y Z
SIndrd dcvI0n 2 0 5
C0rrclI0n c0cIIccnI 50 70 80
Am0unI nvcsIcd 40 40 20
Thc cxpccIcd rcIurn 0I Ihc mrkcI s 8.
Thc rsk prcmum s cxpccIcd I0 bc b0uI 7.
Thc rsk 0I Ihc mrkcI s mcsurcd by Is sIndrd dcvI0n s 0. All Ihc Ihrcc shrcs lc 0n Ihc
SccurIcs mrkcI lnc (SML)
4b7
ClculIc Ihc I0ll0wng vrblcs, IhI wll bc uscd durng y0ur dscuss0n wIh chcI
1c|clcIc.
() Thc cxpccIcd rcIurn 0I y0ur clcnIs p0rII0l0
() Thc rsk 0I Ihc p0rII0l0
Thc bcI IcI0r hs I0 bc c0mplcIcd I0r cch shrc Ihr0ugh Ihc pplcI0n 0I Ihc I0rmul.
ExpccIcd RcIurn R

= R
I
+ (R
m
R
I
)
R
x
= 0. + 0.b0 (0.07) = 5.20
R
y
= 0. + 0.70 (0.07) = 5.90
R
z
= 0. + 0.40 (0.07) = 3.80
E(R
P
) = 0.40 (0.520) + 0.40 (0.590) + 0.20 (0.380)
= b.08 + b.3b + 2.7b
=5.20
p
= 0.40 (0.b0) + 0.40 (0.70) + 0.20 (0.40)
= 0.24 + 0.28 + 0.08
= 0.b0 0R b0.
() NES Plc nd CA0 Plc rc Iw0 c0mpncs qu0Icd 0n Ihc sI0ck mrkcI n Ihc F00d cvcrgcs
nd T0bcc0 sccI0r. 0Ih c0mpncs rc smlr n ll rcspccIs cxccpI IhI NES Plc s
gcrcd whlc CA0 Plc s ungcrcd. NES Plc hs pdup cquIy shrc cpIl hvng
mrkcI vluc 0I .2m whlc CA0 Plc hs n cquIy cpIl wIh mrkcI vluc 0I .5m.
NES Plc ls0 hs dcbI cpIl 0I b00,000 wIh c0up0n rIc 0I 2 pcrccnI whch s
cqul I0 Ihc mrkcI nIcrcsI rIc. Ech 0I Ihc Iw0 c0mpncs crns n 0pcrIng pr0II 0I
300,000.
Assumng 10hn h0lds 5 pcrccnI 0I NES Plc shrcs w0uld y0u dvsc hm I0 crry 0uI n
rbIrgc cIvIy!
(b) M0dgln nd Mllcr (M & M 0rgnl vcrs0n) bclcvc IhI Ihc pIIcrn 0I Inncng
c0mpny d0cs n0I IIccI Is vluc s, cc0rdng I0 Ihcm, rbIrgc cIIccncy w0uld cnsurc
IhI Ihs dscrcpncy n vluc d0cs n0I 0ccur. whI rc Ihc ssumpI0ns undcrlyng Ihs
p0sI0n!
4b8
() CpIl sIrucIurc NES PLC CA0 PLC
EquIy cpIl (mrkcI vluc) ,200,000 ,500,000
2 0cbcnIurcs b00,000
0pcrIng pr0IIs 300,000 300,000
10hn's nvcsImcnI n NES Plc s currcnIly 5 0I Ihc cquIy
IhI s 5 0I N,200,000 = 80,000
pr0II IIcr Ix 0I NES Plc s 300,000 (2 b00,000)
= 300,000 72,000
= 228,000
10hn's nIcrcsI = 5 0I 228,000
= 34,200
() !I 10hn crrcs 0uI rbIrgc cIvIy, hc w0uld scll hs nvcsImcnI n NES Plc
whch wll gvc hm 80,000
() Hc w0uld b0rr0w 5 0I Ihc dcbI 0I NES Pls .c Nb00,000 x 0.5 = 90,000
T0Il Iunds vlblc I0r nvcsImcnI = 270,000
() 10hn wll n0w nvcsI 5 n CA0 Plc 0r ,500,000 x 0.5 = 225,000.
10hn rcIurn n CA0 Plc wll bc cqul I0 45,000 (0r 300,000 x 0.5).
Thc nIcrcsI 0n l0n b0rr0wcd wll bc 2 0I 90,000 = 0,800.
Ths m0unI wll bc dcducIcd Ir0m hs 0vcrll rcIurn 0I 45,000 I0 hvc ncI
rcIurn 0I 34,200.
(v) Ths s Ihc smc rcIurn hc crncd 0n hs nvcsImcnI n NES Plc. H0wcvcr hc
crncd Ihs rcIurn wIh surplus 0I 45,000 ( 270,000 225,000) sIll n hs
hnds I0r IurIhcr nvcsImcnI clscwhcrc.
AlIcrnIvcly 10hn c0uld nvcsI Ihc wh0lc 270,000 n NES Plc. I hc d0cs Ihs hc
wll bc cxpccIng N54,000
Lcss nIcrcsI 0n l0n 0,800
NcI nc0mc =
= 43,200
Ths s hghcr Ihn Ihc cxsIng ncI nc0mc 0I 34,200 by 9000.
10hn w0uld bc bcIIcr 0II crryng 0uI Ihc rbIrgc cIvIy.
() PcrIccI cpIl mrkcIs whcrc:
+ !nI0rmI0n cn bc 0bIncd by ll nvcsI0rs I n0 c0sI.
+ !nvcsI0rs rc rI0nl, uIlIy mxmscrs.
4b9
+ Pcrs0nl b0rr0wng cn bc subsIIuIcd I0r c0rp0rIc b0rr0wng 0n Ihc
smc Icrms
+ Thcrc rc n0 Ixcs nd 0Ihcr mrkcI mpcrIccI0ns.
+ Thcrc rc n0 IrnscI0n c0sIs
() Frms c0uld hvc Ihc smc rsk chrcIcrsIcs.
() Y0u rc gvcn Ihc I0ll0wng nI0rmI0n rclIng I0 mIcrl X n rcspccI 0I
c0mpny A.
Usgc pcr w0rkng dy 30 unIs
C0sIs 0I plcng n 0rdcr 200
UnI C0sI 0I mIcrl 5
C0sI 0I wrch0usng pcr nnum 0
Assumc 250, w0rkng dys n ycr.
() ClculIc Ihc Ec0n0mc 0rdcr unIIy (E0)
() 0vc THREE ssumpI0n undcrlyng Ihc clculI0n, n gcncrl, 0I E0s
(b) Thc I0ll0wng nI0rmI0n s gvcn n rcspccI 0I c0mpny .
Avcrgc usgc 00 unIs pcr wcck
Lcd Imc 2 wccks
Mxmum usgc 50 unIs pcr wcck
Mnmum usgc 40 unIs pcr wcck
E0 400 unIs
ClculIc
() Thc mxmum lcvcl 0I sI0ck
() Thc mnmum lcvcl 0I sI0ck
() Thc rc0rdcr lcvcl
() ()
pplyng Ihc I0rmul
E0 =
=
= 2449.5
= 2450 ppr0xmI0n
470
() AssumpI0n
+ Kn0wn rIc 0I dcmnd
+ Kn0wn nd c0nsInI sI0ckh0ldng c0sI
+ Kn0wn nd c0nsInI 0rdcrng c0sI
+ Kn0wn nd c0nsInI unI prcc
+ !nsInInc0us sI0ck rcplcnshmcnI.
(b) () Mxmmum Lcvcl
= Rc0rdcr lcvcl ( Mn usgc x mn lcd Imc) + E0
= 300 (40 x ) + 400
= 300 40 + 400
= bb0 unIs.
() Mnmum Lcvcl
= Rc0rdcr lcvcl (Avcrgc usgc x Avcrgc lcd Imc)
=
= 50 unIs
() Rc0rdcr lcvcl
= Mxmum usgc x mxmum lcd Imc
= (50 x 2) unIs
= 300 unIs.
() Expln brcIly, Ihc c0nccpI 0I C0rp0rIc 00vcrnncc
(b) SIIc TEN prncplcs 0I C0rp0rIc 00vcrnncc
(c) 0vc Tw0 bcncIIs 0I g00d C0rp0rIc 00vcrnncc
() C0rp0rIc 00vcrnncc s c0nccrncd wIh Ihc pr0m0I0n 0I culIurc n whch Ihc drccI0rs
gvc pr0rIy I0 Ihc pursuI 0I Ihc bcsI cIhcl prcIcc n Ihc mngcmcnI 0I n 0rgnsI0n.
C0rp0rIc g0vcrnncc I0cuscs 0n mny spccIs 0I mngcmcnI prcIccs ncludng
cc0unIblIy 0I Ihc b0rd 0I drccI0rs, Irnsprcncy n Ihc dscl0surc 0I Ihc IIrs 0I Ihc
c0mpny, h0ncsI ppr0ch I0 Ihc mngcmcnI 0I rsk, rcc0gnI0n 0I ll sIkch0ldcrs'
nIcrcsIs nd snccrIy 0I purp0sc n Ihc csIblshmcnI 0I udI c0mmIIccs nd c0nducI
0I nnul gcncrl mccIngs (A0Ms).
(b) Prncplcs 0I c0rp0rIc g0vcrnncc ncludc Ihc I0ll0wng:
() Lyng s0ld I0undI0n I0r cIIccIvc nd cIIccnI mngcmcnI 0I Ihc 0rgnsI0n
nd I0r 0vcrsghI IuncI0ns 0I Ihc vr0us c0mmIIccs 0I Ihc 0rd,
() SIrucIurng Ihc 0rd n such wy s I0 crcIc vluc I0r Ihc c0mpny,
() Pr0m0Ing cIhcl nd rcsp0nsblc dccs0n mkng,
(v) SIcgurdng Ihc nIcgrIy 0I Inncl rcp0rIng,
(v) Mkng cmprcl, Imcly nd crcdblc, dscl0surc I0 Ihc rcgulI0ry uIh0rIcs
47
ncludng bchvng rcsp0nsbly n Ihc 'IcIs bchnd Ihc Igurcs' prcscnII0ns I0
Ihc Ngcrn SI0ck Exchngc (NSE),
(v) Rcc0gnI0n 0I, nd rcspccI I0r Ihc rghIs 0I ll sIkch0ldcrs,
(v) Ensurng snccrIy 0I purp0sc n Ihc mngcmcnI 0I rsk prIculrly n Ihc rc
0I rsk dvcrsIcI0n,
(v) Adhcrng I0 Ihc C0dc 0I c0nducI I0r C0mpny 0rccI0rs 0n C0rp0rIc 00vcrnncc,
(x) Ensurng Ihc IulIlmcnI 0I Ihc c0mpny's s0cl rcsp0nsblIcs I0 c0nsumcrs by,
I0r cxmplc, bsInng Ir0m pr0ducng nd scllng Ikc nd/0r dulIcrIcd
pr0ducIs,
(x) Ensurng Ihc IulIlmcnI 0I Ihc c0mpny's s0cl rcsp0nsblIcs I0 Ihc publc by
I0r nsIncc, prcvcnIng wIcr nd r p0lluI0n, nd
(x) cnsurng Ihc IulIlmcnI 0I Ihc c0mpny's s0cl rcsp0nsblIcs I0 Ihc c0mmunIy
n. whch I 0pcrIcs by pr0vdng bsc IclIcs such s cducI0n I0r Ihc chldrcn,
wrd 0I sch0lrshps, b0rch0lcs, rccrcI0n IclIcs nd s0 0n.
(c) cncIIs 0I g00d c0rp0rIc g0vcrnncc ncludc:
() 000d c0rp0rIc g0vcrnncc,
() !nsIls nvcsI0rs' c0nIdcncc n Ihc drccI0rs 0I Ihc c0mpny,
() Pr0m0Ics mrkcI cIIccncy nd nIcgrIy,
(v) Enhnccs Inncl sIblIy nd gr0wIh,
(v) Hs Ihc p0IcnIl I0r IIrcIng I0rcgn drccI nvcsImcnI,
(v) CrcIcs vcry c0mpcIIvc cnvr0nmcnI,
(v) Enhnccs cc0unIblIy nd IhcrcI0rc ssurcs g00d pcrI0rmncc by Ihc drccI0rs,
nd
(v) Pr0m0Ics cIIccIvc nd cIIccnI usc 0I scrcc rcs0urccs.
() SIIc nd cxpln, brcIly, THREE rcs 0I Inncl mngcmcnI prcIccs IhI rcccvc
supp0rI Ir0m Ihc 0ccs0n supp0rI sysIcms 0I Iypcl !nI0rmI0n nd C0mmuncI0n
Tcchn0l0gy (!CT) cnvr0nmcnI.
(b) 0vc THREE dIIcrcnccs bcIwccn MngcmcnI !nI0rmI0n SysIcms (M!S) nd 0ccs0n
Supp0rI SysIcms.
() Thc I0ll0wng rcs 0I Inncl mngcmcnI prcIccs IhI gcI supp0rI Ir0m 0ccs0n
Supp0rI SysIcms (0SS) rc:
472
() Fnncl plnnng,
() CpIl budgcIng, nd
() 0pImsI0n 0I Inncl pr0blcms nv0lvng c0mplcx nd nIcrcIng vrblcs
IhI lmI Ihc chcvcmcnI 0I Ihc Irm's sIrIcgc 0b|ccIvcs(s).
()
Fnncl mngcrs rcccvc mmcnsc supp0rI Ir0m 0SS whcn hc Ikcs l0ngIcrm
Inncl plnnng dccs0ns nv0lvng mny ssumpI0ns IhI |0nIly IIccI Ihcsc
dccs0n. whcrc Ihcrc s nccd I0 IcsI Ihc cIIccI 0I sy chngc n ny 0I Ihc
ssumpI0ns 0n Ihc rcsulI (scnsIvIy nlyss), c0mpuIcrscd Inncl plnnng
m0dcls cn bc pr0grmmcd I0 crry Ihs 0uI nsInInc0usly. Thc spccIc rcs
0I Inncl plnnng IhI rcccvc Ihs Iypc 0I supp0rI Ir0m 0SS ncludc, Ihc
cIIccI 0I dIIcrcnI slcs v0lumcs, dIIcrcnI scllng prccs, dIIcrcnI npuI c0sIs 0n
Ihc I0rccsI Igurcs n Ihc pr0|ccIcd Inncl sIIcmcnIs.
0SS pr0vdc supp0rI whcrc Ihcrc s nccd I0 sscss dIIcrcnI Inncng plns nd
Ihcr mpcI 0n Ihc crIcl vrblcs such s crnng pcr shrc (EPS), dcbI
cquIy rI0 (gcrng) nd s0 0n.
0SS, n ddI0n I0 Ihc b0vc, pr0vdcs supp0rI whcrc Ihcrc s nccd I0 lIcr n
nIl pln bscd 0n Ihc rcsulI 0I prcv0us I0rccsIs. F0r cxmplc cpIl mghI
bc c0nsIrnI, nd I mghI bc ncccssry I0 sclc d0wn Ihc sc0pc 0I cIvIcs.
()
0SS pr0vdcs Ihc much nccdcd supp0rI n Ihc rcs 0I csImIng csh Il0ws
nd nc0rp0rIng rsk nd nIlI0n nI0 Ihc cpIl budgcIng pr0ccss. Fnncl
mngcrs ls0 gcI supp0rI Ir0m 0SS whcn Ihcy cvluIc Ihc cIIccI 0I lIcrnIvc
dsc0unI rIcs 0n pr0|ccIs ncI prcscnI vlucs. 0SS rc prIculrly uscIul n Ihc
cvluI0n 0I dvnccd mnuIcIurng Icchn0l0gy (AMT) pr0|ccIs whcrc csh
Il0ws IhI hvc I0 bc csImIcd g0 nI0 Irly dsInI IuIurc. SprcdshccI
pr0grmmcs c0nInng cpIl budgcIng prcscnI vlucs m0dcls, rc prIculrly
uscIul n Ihs rcspccI.
()
0SS m0dcl bsc mghI hvc 0pImsng m0dcls such s lncr pr0grmmng
m0dcls. Thcsc m0dcls c0uld bc uscd I0 pr0vdc s0luI0ns I0 pr0blcms nv0lvng
0pImsI0n 0I gvcn 0b|ccIvc (pr0II mxmsI0n 0r c0sI mnmsI0n) n
Ihc Icc 0I mny (I lcsc m0rc Ihn Iw0) nIcrcIng vrblcs nd c0mplcx
rclI0nshps. Thc lmIng IcI0rs mghI bc lb0ur, mchnc h0urs, cpIl nd
0Ihcrs wh0sc ncdcnccs |0nIly IIccI pr0II 0r c0sI.
(b) 0vcn Ihc dvnccmcnI n Icchn0l0gcs n Ihc rc 0I nI0rmI0n nd c0mmuncI0n I
s ncccssry I0 hghlghI s0mc dIIcrcnccs bcIwccn Ihc IrdI0nl MngcmcnI
!nI0rmI0n SysIcms nd 0ccs0n Supp0rI SysIcm. S0mc 0I Ihc dIIcrcnccs rc sIIcd 0n
pgc 473.
473
Thc 0rd 0I M Plc 0I Ihc uldng MIcrl sccI0r hs rcccnIly dccdcd I0 chcvc p0sIvc
gr0wIh nd bcIIcr 0pp0rIunIcs Ihr0ugh mcrgcr. Thc 0rd, IIcr Ih0r0ugh scrch, unnm0usly
grccd I0 pck FM Plc, c0mpny n Ihc smc sccI0r.
As Ihc Fnncl Mngcr 0I M Plc, y0u hvc bccn skcd I0 crIclly cxmnc, bscd 0n Ihc
nI0rmI0n sIIcd bcl0w, Ihc p0ssblc cqusI0n 0I FM Plc usng mrkcI prcc ppr0ch.
M Plc 2 54 ,000,000
FM Plc 8 540,000
Thc dvdcnds wcrc c0vcrcd by crnngs .5 Imcs I0r M Plc nd 2.0 Imcs I0r FM Plc. AIIcr n n
dcpIh nlyss, y0u 0bscrvc IhI Ihc mrkcI cxpccIs pcrpcIul gr0wIh 0I 0 pcr ccnI cch ycr
n Ihc crnngs nd dvdcnds 0I FM Plc nd Ihcsc crnngs nd dvdcnds rc cxpccIcd I0
ncrcsc I0 b0uI 2 cch ycr undcr Ihc mngcmcnI 0I M Plc. M Plc d0cs n0I nIcnd I0 ncur
ny ddI0nl cpIl cxpcndIurc. Smlrly I d0cs n0I cxpccI ny chngc n Ihc rsk c0mplcx0n
0I Ihc c0mpny, I0ll0wng Ihc mcrgcr. Thus, Ihc cnIrc gr0wIh s cxpccIcd I0 rsc purcly Ir0m Ihc
cIIccIvc uIlsI0n 0I FM Plc sscIs. !I s cxpccIcd IhI Ihc mrkcI IIcr Ihc mcrgcr w0uld rcIn
M Plc's prcccrnngs rI0.
() ClculIc Ihc ncrcsc n vluc rsng Ir0m Ihc mcrgcr.
() EvluIc Ihc gns 0r l0sscs IhI rc lkcly I0 ccruc I0 Ihc shrch0ldcrs 0I M Plc I I
cqurcs cch shrc 0I FM Plc I prcmum 0I 0ncIhrd 0I Is currcnI mrkcI prcc.
() whI rc Ihc Inncl cIIccIs, n Icrms 0I vluc, 0I Ihc mcrgcr 0n Ihc shrch0ldcr 0I FM
Plc ssumng Ihc ncw cxchngc rI0 s Iw0 shrcs 0I M Plc I0r cvcry Ivc shrcs 0I FM
Plc!
474
(v) Assumng Ihc mrkcI d0cs n0I cxpccI ny ncrcscd gr0wIh rIc s ndcIcd n Ihc
qucsI0n, sscss Ihc gns 0r l0sscs rsng Ir0m Ihc mcrgcr.
Ernngs pcr shrc (EPS)
M Plc = 2 x .5 = 3.00
FM Plc = x 2 = 2.00
P/E rI0
M Plc = 54/3 = 8
FM Plc = 8/2 = 9
Exchngc rI0 (bscd 0n mrkcI prcc) = 8/54 = 0.333 0r /3
Ths mcns M Plc wll ssuc /3 0I Is 0wn shrc I0r cvcry shrc 0I FM Plc
() wIh0uI Mcrgcr
M Plc FM Plc
T0Il crnng (,000,000 x 3) 3,000,000
(540,000 x 2 x .0) ,88,000
\luc 3,000,000 x 8 54,000,000
,88,000 x 9 0,b92,000
C0mbncd vluc = 54,000,000 + 0,b92,000
= b4,b92,000
wIh Mcrgcr M Plc FM Plc
T0Il crnngs 3,000,000
(3 x ,000,000)
(2 x .2 x 540,000) ,209,b00
C0mbncd I0Il crnngs 4,209,b00
C0mbncd I0Il n0 0I shrcs ,000,000 + /3 0I 540,000
= ,80,000 shrcs
C0mbncd EPS = 3.57
ExpccIcd
MrkcI p0sImcrgcr P/E rI0: 8
T0Il vluc 0I cnlrgcd M Plc = 3.57 x 8 x ,80,000 = 75,82b,800
!ncrcsc n vluc rsng Ir0m Ihc mcrgcr
= 75,82b,800 b4,b92,000
= ,34,800
() Ncw Prcc Lcvcl = 24 .c. 8 x

/
3
AI N24, Ihc cxchngc rI0 bcc0mcs 0.444 0I M Plc shrcs I0r cch shrc 0I FM Plc
T0Il numbcr 0I shrcs bcc0mc ,000,000 + 240,000 0I MC Plc = ,240,000 shrcs
475
P0sImcrgcr EPS = 4,209,b00/,240,000 = 3.39
Prcmcrgcr EPS = 3.00
0n = 8 ( 3.39 3.00)
= 7.02
() Ncw Exchngc rI0: 0.40 0I M Plc shrcs I0r cch shrc 0I FM Plc
T0Il numbcr 0I shrcs ,000,000 + 2b,000 = ,2b,000
P0sImcrgcr EPS = 4,209,b00/,2b,000
= 3.4b pcr cch shrc cnlrgcd M Plc
FM Plc shrc wll cxchngc I0r 0.40 0I M Plc. ThcrcI0rc EPS cquvlcnI 0I cch
0ld FM shrc = 3.4b x 0.4 = .38
P0sImcrgcr vluc = .38 x 8 = 24.84
Prcmcrgcr vluc = 2.20 x 9 = 9.80 (.c. ,88,000/540,000 x 9)
0n pcr shrc = 5.04
(v). Thcrc rc n0 cxpccIcd syncrgsIc cIIccIs. Thc cxpccII0n s IhcrcI0rc IhI p0sI
mcrgcr Plc rI0 wll ppr0ch Ihc wcghIcd vcrgc (wcghIcd by Ihcr crnngs)
0I Ihc Iw0 prcmcrgcr P/E rI0 .c. (3 x 8) + (2 x 9) = 72/5 = 4.4. MulIply Ihs
Igurc by c0mbncd p0sImcrgcr crnngs gvc N4,209,b00 = b0,b8,240. Hcncc
n0 ncrcsc n shrch0ldcrs' wclIh.
!I hs bccn sd n scvcrl qurIcrs nd by mny sIkch0ldcrs IhI smll Irms rc I dsdvnIgc
n Icrms 0I 0bInng Inncc n Ihc cpIl mrkcIs
() SIIc nd cxpln F!\E rcs0ns why smll Irms rc I dsdvnIgc n 0bInng
Inncc.
(b) 00cs Ihs ndcIc bs gnsI smll Irms n Ihc cpIl mrkcIs 0r cn I bc
cxplncd by Ihc n0rml cc0n0mc IcI0rs 0pcrIng n Ihc mrkcIs!
() SubsInIl m0unI 0I svngs d0 Il0w nI0 Ihc hnds 0I Inncl nIcrmcdrcs whch
prcIcr I0 lcnd I0 bg c0mpncs rIhcr Ihn I0 smll busncss I0r Ihc I0ll0wng rcs0ns:
() C0sIs 0I mngng smll dcbIs pcr N nvcsIcd rc vcry hgh.
() Lcss s kn0wn b0uI smll Irms c0mprcd I0 lrgc Irms.
() Thc gcncrl bclcI s IhI smll Irms rc hghly rsky Ir0m Ihc sIndp0nI 0I
ns0lvcncy nd lqudI0n.
(v) M0sI smll Irms rc n0I qu0Icd 0n Ihc sI0ck mrkcI nd nvcsI0rs nccd n cxsI
r0uIc I0r rclsI0n 0I Ihcr nvcsImcnI I ncccssry.
47b
(v) Smll Irms d0 n0I p0sscss cc0unIng sysIcms whch gurnIcc Irnsprcncy n
Ihc hndlng 0I Inncl mIIcr.
(v) Smll Irms rc nIurlly dsc0urgcd Ir0m ppr0chng Ihc sI0ck cxchngc s I
s dIIculI nd cxpcnsvc pr0ccss.
(b) !I d0cs n0I ncccssrly mcn IhI Ihcrc s bs gnsI smll Irms n Ihc cpIl mrkcIs.
!I ppcrs Ihc n0rml cc0n0mc IcI0rs rc I w0rk. Thc ddI0nl rcIurn cxpccIcd by
lcndcrs mghI n0I bc |usIIcd by Ihc cxIr rsks nv0lvcd. M0rc0vcr Ihc IIcndnI
dmnsIrIvc c0sIs whch rc n0rmlly psscd I0 b0rr0wcrs, mghI n0I bc wIhn Ihc
rcch 0I smll Irms.
A US mulInI0nl Irm nIcnds I0 undcrIkc $200 mll0n pr0|ccI n Ngcr. Thc pr0|ccI wll
hvc lIc 0I Iw0 ycrs. 0urng Ihs Iw0ycr pcr0d, Ihc 0pcrIng csh Il0ws rc cxpccIcd I0 bc
$25 mll0n cch ycr. !n ddI0n, Ihc grccmcnI pr0vdcs I0r Ihc rcpymcnI 0I $5 mll0n
cch ycr, rcprcscnIng Iunds IhI wcrc c0mpuls0rly hcld n Ihc c0unIry durng Ihc rcgmc 0I
cxchngc c0nIr0ls. Thc shrch0ldcrs 0I Ihc US Irm rcqurc rIc 0I rcIurn 0I 0 pcrccnI. H0wcvcr,
I s bclcvcd IhI Ihc dsc0unI rIc I0r Ihc cxchngc c0nIr0l v0dncc c0uld bc b pcrccnI bccusc
0I Ihc l0w dcgrcc 0I unccrInIy IIchng I0 Ihcsc csh Il0ws.
Usng Ihc ppr0prIc pr0|ccI cvluI0n Icchnquc, dvsc whcIhcr Ihc pr0|ccI sh0uld bc
undcrIkcn.
Thc ppr0prIc Icchnquc s Ihc Ad|usIcd PrcscnI \luc (AP\)
Thc AP\ 0I Ihc pr0|ccI wll bc s I0ll0ws:
AP\ = $
= $
= $b4.45
N0Ic: All Igurcs rc n $mll0n.
Thc pr0|ccI sh0uld bc undcrIkcn s I hs p0sIvc NP\ 0I $b4.45 mll0n Ikng nI0 c0nsdcrI0n
b0Ih Ihc 0pcrIng csh Il0ws nd Ihc Inncl cIIccIs.
() !n Ihc c0nIcxI 0I Inncl mngcmcnI 0I Irms, dcInc nIcrnI0nl rsks nd gvc
Tw0 cxmplcs 0I such rsks.
(b) McnI0n F0UR m|0r rcs 0I Inncl mngcmcnI prcIccs IhI rc IIccIcd by
nIcrnI0nl rsks nd gvc n EACH csc 0nc nsIncc 0I h0w I s IIccIcd.
(c) SIIc sx dcvccs IhI c0uld bc uscd by Inncl mngcrs I0 rcducc nIcrnI0nl rsks.
477
() !nIcrnI0nl rsks rc Ih0sc rsks IhI rc unquc I0 Ih0sc Irms IhI rc cnggcd n
cr0ssb0rdcr busncss cIvIcs.
Exmplcs rc:
() F0rcgn cxchngc rsk nd
() P0lIcl rsks
(b) ()
H0w cpIl budgcIng s IIccIcd
+ Rsk prcmum ncrcscs Ihc 'bcnchmrk' rIc
+ ExIr prcmum 0n Ihc I0p 0I Ihc rcqurcd rIc 0I rcIurn nccdcd I0 c0vcr
I0rcgn cxchngc rsk.
+ Pr0|ccIs whch w0uld hvc bccn cccpIcd mghI bcc0mc uncccpIblc
bccusc 0I I0rcgn cxchngc rsk.
()
Rcqurcd rIc 0I rcIurn s ncrcscd bccusc 0I I0rcgn cxchngc rsk
()
!nIcrnI0nl nvcsI0rs rcqurc cxIr rsk prcmum whcrc Ihcy hvc lrgc
nvcsImcnIs n c0unIrcs wIh hghly v0lIlc currcnccs.
(v)
L0wcr vlucs wll bc IIchcd I0 nvcsImcnIs n c0unIrcs wIh vcry unsIblc
currcnccs.
(v)
AddI0nl c0mplcxIy bccusc 0I Ihc mpcI 0I I0rcgn cxchngc rsk 0n m0vcmcnI
0I Iunds m0ng c0unIrcs
(Any 4)
(c) 0cvccs IhI c0uld bc uscd by Inncl mngcrs I0r mnmsng nIcrnI0nl rsks.
+ !nv0cng n h0mc currcncy
+ AccclcrIng 0r dccclcrIng pymcnIs 0I currcnccs cxpccIcd I0 pprccIc 0r
dcprccIc rcspccIvcly (lcdng nd lggng
+ AccclcrIng 0r ccclcrIng rcccpIs 0I currcnccs cxpccIcd I0 dcprccIc 0r
pprccIc rcspccIvcly.
All Ihc b0vc sIcps rc rcIcrrcd I0 s nIcrnl hcdgng
+ Trdng n I0rwrd cxchngc c0nIrcIs
+ Trdng n IuIurcs c0nIrcIs
+ uyng 0r scllng 0I cll 0r puI currcncy 0pI0ns
+ EnIcrng nI0 currcncy swp rrngcmcnIs
(Any b)
479
Adc Phrmcy LId., smll drug mrkcIng c0mpny l0cIcd I MI0r !ndusIrl EsIIc ws
nc0rp0rIcd b0uI Ivc ycrs g0 I0r Ihc purp0sc 0I mnuIcIurng nd scllng phrmccuIcl
pr0ducIs. Thc c0mpny s 0wncd 00 pcr ccnI by c0uplc wh0 rc n Ihcr mdsxIcs.
Thc currcnI gl0bl cc0n0mc mclId0wn hs scr0usly IIccIcd Ihcr drug mnuIcIurng busncss.
Slcs rc Illng, 0pcrI0n c0sIs rc ncrcsng n lcps nd b0unds nd Ihc c0mpny's pr0II
rcduccd c0nsdcrbly. H0wcvcr, Ihc pr0II hs rcmncd sIblc I0r s0mcImc n0w. Fccd wIh
Ihc rcducI0n n Ihc pr0II Igurc nd Ihc prcscnI ncrcsc n cxchngc rIc, Ihc c0uplc wh0 rc
b0Ih drccI0rs 0I Ihc c0mpny, dccdcd I0 d0 wy wIh Ihc c0mpny by 0IIcrng I I0r slc I Ihc
skng prcc 0I N0 mll0n. 'Thc w0rsI hs hppcncd' Ihcy sd. Thcy rc 0I Ihc 0pn0n IhI Ihc
busncss s n0 m0rc mccIng Ihcr sprI0ns hcncc Ihcr dccs0n. Thcy Ih0ughI 0I g0ng nI0
n0Ihcr busncss.
R0nk Plc, qu0Icd phrmccuIcl c0mpny (lsIcd n Ihc cmcrgng mrkcI sccI0r), smlr n
ll rcspccIs I0 Adc Phrmcy LId. hs 0IIcrcd I0 Ikc 0vcr Adc Phrmcy LId. Thc shrcs 0I R0nk
Plc rc prcscnIly qu0Icd 0n Ihc cxchngc I 3.b0 pcr shrc. !Is lsI dvdcnd pymcnI ws 0
k0b0 pcr shrc. Ths dvdcnd ws 'c0vcrcd 2 Imcs.
Thc m0sI rcccnI blncc shccI 0I Adc Phrmcy LId s s I0ll0ws:
NcI AsscIs 3,000
,500,000 0rdnry shrcs 0I 50k cch 750
Pr0II nd l0ss blncc 2,250
3,000
Thc ncI sscIs 0I Ihc c0mpny whch sI00d I 3mll0n s I 3 0cccmbcr 2008 s mdc up 0I
Ixcd sscIs 0I 4.5mll0n, currcnI sscIs 0I 2 mll0n nd currcnI lblIcs 0I 3.5mll0n.
Thc c0mpny's pr0II bcI0rc IxI0n hvc rcccnIly bcng h0vcrng r0und 75,000 pcr nnum.
!I s bclcvcd IhI Ihs Igurc wll bc mnIncd I0r n ndcInIc pcr0d hvng sIblzcd I
r0und IhI Igurc I0r s0mcImc.
Thc b0vc ws Ihc p0sI0n 0I Adc Phrmcy LId whcn I 0IIcrcd Ihc c0mpny I0r slc.
() 0vc Tw0 rcs0ns why Ihc gl0bl cc0n0mc mclI d0wn hs bccn mpcIng ncgIvcly
0n Ihc Ngcrn cc0n0my nd c0nscqucnIly 0n Ihc Ngcrn ndusIrcs n gcncrl.
(b) !n Icrms 0I mngcmcnI nI0rmI0n, gvc Tw0 rcs0ns I0r Ihc nblIy 0I Ihc c0mpny
I0 hvc Ilcd I0 I0rcscc Ihc sIuI0n whch w0uld hvc mdc Ihcm Ikc prcvcnIvc
cI0n I0 mIgIc Ihcr prcscnI prcdcmcnI.
(c) Prcprc rclcvnI nI0rmI0n IhI w0uld sssI n |usIIyng Ihc prcc IhI s puI I0rwrd
by Ihc c0mpny nd mkc y0ur c0mmcnIs s ppr0prIc.
480
(d) Advsc R0nk Plc 0n Is nIcnI0n I0 Ikc 0vcr Adc Phrmcy LId.
() () Ngcr s n mp0rI 0rcnIcd c0mpny wIh 0vcr 90 0I hcr I0rcgn cxchngc
crnngs dcpcndcnI 0n cxp0rI 0I crudc 0l. Als0 0ur I0rcgn rcscrvcs nd 0Ihcr
sscIs rc kcpI subscqucnIly n US d0llrs. US s Ihc grcIcsI c0nsumcr 0I 0ur
0l nd US cc0n0my s 0nc 0I Ihc w0rsI hI by Ihc cc0n0mc mclI d0wn.
() Ngcr s dcvcl0png nI0n. !I nccds subsInIl I0rcgn drccI nvcsImcnIs.
Thcsc nvcsImcnIs mghI n0I bc I0rIhc0mng n Ihc ncr IuIurc bccusc 0I Ihs
mclId0wn. csdcs, Ihc 0ncs lrcdy mdc rc currcnIly bcng rclscd Ihcrcby
puIIng Ihc cc0n0my, prIculrly Ihc bnkng ndusIry, n prccr0us Inncl
sIuI0n.
(b) As smll prvIc c0mpny, Adc phrmcy's cc0unIng nI0rmI0n sysIcm mghI bc s0
gr0ssly ndcquIc IhI Ihc drccI0r mghI n0I bc hvng ncccssry nI0rmI0n IhI
w0uld hclp Ihcm sscss Ihc IuIurc.
Thc drccI0rs mghI lck dcquIc mngcmcnI skll I0 bc blc I0 I0rccsI, prcprc
budgcIs nd nlysc IuIurc cvcnIs nd Ihcr c0nscqucnccs 0n Ihcr c0mpny.
(c) () \luc 0I Adc Phrmcy usng Ernng Appr0ch.
Ernngs pcr shrc (EPS) - Adc phrmcy = 75,000/,500,000 = 0.2. Adc
phrmcy s prvIc c0mpny, buI I hs R0nk Plc wh0sc sIIsIcs cn bc uscd
s surr0gIc:
R0nk dvdcnd pcr shrc (0PS) = 0.0. Ths s c0vcrcd Iwcc, Is crnngs pcr
shrc (EPS) s IhcrcI0rc 2 x 0.0 = 0.20. !Is prcc 0n Ihc sI0ck cxchngc s
3.b0. !Is prcccrnngs (P/E) rI0 s IhcrcI0rc 8 ( 3.b0/0.20). \luc 0I Adc
Phrmcy = 75,000 x 8 = 3,50,000
() \luc usng NcI AsscI Appr0ch: 3,000,000
usng Ihc crnngs ppr0ch s bss, Ihc vluc 0I Ihc c0mpny s 3.5m.
Ths c0uld bc l0wcr gvcn Ihc IcI IhI I s prvIc c0mpny. Evcn I Ihs Igurc, I s
0nly b0uI 0nc Ihrd 0I whI Ihc drccI0rs rc skng I0r 0m l00ks vcry hgh. AlIh0ugh
Ihc drccI0rs sd Ihc w0rsI hd hppcncd, buI h0w rc Ihcy surc! S0, Ihc 75,000 p.
mghI n0I bc susIncd.
!n ddI0n, h0w rc Ihc drccI0rs surc IhI Ihc 75,000 pr0II wll bc mnIncd!
Ths n0IwIhsIndng Ihc sscI vluc ppr0ch ncdcnIlly gvcs lm0sI Ihc smc
vluI0n s Ihc crnngs ppr0ch. Ths Icnds I0 c0nIrm IhI Ihc vluc 0I Adc Phrmcy
LId sh0uld bc n Ihc rcg0n 0I 3m. Thus 0n Ihc bss 0I b0Ih ppr0chcs Ihc skng
Igurc 0I 0m ppcrs I0 bc pr0hbIvc.
!n ddI0n Ihc c0mpny l00ks llqud. Thc dIIcrcncc bcIwccn currcnI sscIs nd currcnI
lblIcs s ncgIvc.
(d) Thc c0mpny s n0I suIblc cnddIc I0r purchsc cxccpI Ihcrc wcrc
nI0rmI0n b0uI Ihc c0mpny whch wcrc n0I dscl0scd n Ihc qucsI0n such s sscIs
bcng w0rIh m0rc Ihn Ihcr b00k vluc. Als0 Ihcrc mghI bc sgns 0I crly rcc0vcry
48
Ir0m gcncrl cc0n0mc mclId0wn whch ws wr0ngly |udgcd by Ihc drccI0rs. M0rc0vcr
Ihcrc mghI bc p0ssblIy 0I n|ccIng nI0 Ihc busncss ncw mngcmcnI IlcnIs IhI
w0uld pr0pcrly Ikc crc 0I mrkcIng 0I ncw pr0ducIs, Icchncl nd Icchn0l0gcl
pr0blcms nd pr0blcms c0nnccIcd wIh pr0vs0n 0I rclcvnI mngcmcnI nI0rmI0n.
Alh| Hmmcd s shrch0ldcr 0I NzcIh Plc whch hs |usI mdc rghIs ssuc 0I ,754,557,24
0rdnry shrcs 0I 50 k0b0 cch 0n Ihc bss 0I 0nc () 0rdnry shrc I0r cvcry I0ur (4) 0rdnry
shrcs hcld s I 3 Mrch, 2009 I 2 pcr shrc pyblc n Iull 0n cccpIncc.
Thc Inncl dvscr I0 Ihc c0mpny s NzcIh CpIl nd Ihc 10nI !ssung H0uscs rc NF
CpIl, C!T SccurIcs nd SSESCCA !nvcsImcnI nd SccurIcs LId. AcccpIncc lsI 0pcns 0n
My 8, 2009 nd cl0scs 0n 1unc 9, 2009. Thc rghIs cn bc Irdcd 0n Ihc Il00r 0I Ihc Ngcrn
SI0ck Exchngc durng Ihc pcr0d 0I Ihc RghIs !ssuc. Thc currcnI mrkcI prcc 0I Ihc shrc 0I
N!ZETH PLC |usI bcI0rc Ihc nn0unccmcnI 0I Ihc ssuc s 5.00. Alh| Hmmcd hs rcccvcd
RghIs Crculr dIcd Aprl 20, 2009 pr0vs0nlly ll0IIng I0 hm Ihc numbcr 0I shrcs hc s
cnIIlcd I0 undcr Ihc rghIs ssuc (bscd 0n Ihc prcscnI numbcr 0I Is shrch0ldng). Ths Igurc
s ndcIcd n Ihc AcccpIncc/RcnuncI0n I0rm whch s scnI l0ng wIh Ihc RghIs crculr.
Thc ncw 0rdnry shrcs wll rnk prpssu wIh Ihc cxsIng 0rdnry shrcs 0I Ihc c0mpny.
Thc pr0vs0nl ll0ImcnI lcIIcr whch s cmb0dcd n Ihc rghIs crculr ndcIcs IhI Alh|
Hmmcd (s n cxsIng shrch0ldcr 0I Ihc c0mpny) my cccpI ll 0r s0mc 0I Ihc shrcs
pr0vs0nlly ll0IIcd I0 hm 0r rcn0uncc hs rghIs I0 ll 0r s0mc 0I Ihcm. Thcrc rc ls0
nsIrucI0ns n Ihc lcIIcr 0n h0w Ihc AcccpIncc/RcnuncI0n I0rm s I0 bc c0mplcIcd.
Y0u rc cl0sc Ircnd nd c0nIdnI 0I Alh| Hmmcd. scd 0n Ihs, hc hs dccdcd I0 dscuss
wIh y0u hs 0wncrshp nIcrcsIs n NzcIh Plc Hc Iclls y0u, ! 0wn b,000 shrcs n NzcIh Plc
nd hs |usI rcccvcd, Ihs d0cumcnI. Hc ls0 sys '! d0n'I kn0w whI Ihs d0cumcnI mcns, !
d0n'I kn0w whI I0 d0 wIh I, mc ! n0 gcI Imc 0'
As Ircnd 0I Alh| Hmmcd ( mngcr n 1MC SccurIcs nd !nvcsImcnIs LId), h0w w0uld y0u
rcsp0nd I0 Ihc I0ll0wng:
() Expln I0 Alh| Hmmcd (wh0 s |usI dclcr n m0I0r vchclcs Ihc nIurc 0I Ihc
d0cumcnI!
(b) 0vc Ihc mcnng 0I Ihc w0rd 'pr pssu' n Ihc c0nIcxI 0I Ihs csc.
(c) Thc dvcc n Ihc lcIIcr rcgrdng AcccpIncc hs s0mc mplcI0ns I0r y0ur Ircnd s
n 0wncr 0I b,000 0rdnry shrcs n NzcIh Plc. Expln I0 y0ur Ircnd whI Ihcsc
mplcI0ns rc nd Ihc cIIccI 0I cch 0I Ihcm 0n hs wclIh. (Supp0rI y0ur cxplnI0n
wIh rclcvnI clculI0ns).
(d) whch rcgulI0ry uIh0rIy n0rmlly ppr0vcs Ihs Iypc 0I ssuc nd whI s Ihc nmc
gvcn I0 Ihc mrkcI n whch ncw ssucs 0I Ihs Iypc rc mdc!
(c) !n Ihs ncw cr 0I ErghIs, h0w w0uld Alh| Hmmcd's IrnscI0ns bc dclI wIh
ssumng hc sh0ws nIcrcsI n Ihc rghIs!
482
(I) Assumng Alh| Hmmcd sh0wcd vcry kccn nIcrcsI, IIcr y0ur cxplnI0n, nd 0IIcrs
I0 subscrbc I0 m0rc shrcs Ihn wcrc ll0IIcd I0 hm, whI sh0uld hc d0!
(g) whI w0uld bc y0ur Inl dvcc I0 Alh| Hmmcd s Ircnd!
() Thc d0cumcnI s n mp0rInI 0nc (n0I |usI ny 0Ihcr d0cumcnI) IhI hs gvcn Alh|
Hmmcd s0mc ncw shrcs n Ihc c0mpny, bscd 0n hs pr0p0rI0nIc nIcrcsIs, I
prcc whch s lIIlc l0wcr Ihn Ihc currcnI mrkcI prcc, Thc 0nly Ihng Alh| Hmmcd
musI n0I d0 n Ihc crcumsIncc s I0 rc|ccI Ihc 0IIcr n Is cnIrcIy s Ihs mghI cusc
Ihc vluc 0I hs nvcsImcnI n N!ZETH Plc I0 Ill s wll bc sh0wn lIcr.
(b) !I mcns IhI Ihc ssuc w0uld n0I IIccI Ihc pr0p0rI0nIc nIcrcsIs 0I cch shrch0ldcr
n Ihc c0mpny.
(c) Thc mplcI0ns rc Ihc c0urscs 0I cI0n 0pcn I0 Alh| Hmmcd n rcspccI 0I Ihc rghIs
ssuc. As lsIcd bcl0w, hc hs F0UR c0urscs 0I cI0n.
() Tkc up Ihc rghIs n Iull.
() Scll ll Ihc rghIs.
() Scll cn0ugh rghIs I0 pr0vdc csh I0 subscrbc I0r Ihc blncc.
(v) 00 n0Ihng.
Prclmnry clculI0ns
4 0ld shrcs @ 5 b0.00
ncw shrcs @ 2 2.00
5 72.00
Thc0rcIcl ExRghI Prcc 72/5 = 4.40
\luc 0I Ihc RghI: 4.40 - 2 = 2.40
Tkc up Ihc rghIs n Iull
\luc 0I h0ldng bcI0rc rghIs ssuc (b,000 x 5) 240,000
\luc 0I h0ldngs IIcr ssuc 20,000 x 4.40 288,000
Lcss csh uscd I0 subscrbcd I0 Ihc rghIs
4,000 @ 2 48,000
240,000
Scll ll Ihc rghIs
\luc 0I h0ldngs bcI0rc rghI ssuc 240,000
\luc 0I h0ldng IIcr rghIs ssuc
b,000 x 4.40 230.400
Add csh rcccvcd Ir0m slc 0I rghIs
4000 x 2.40 9,b00
240,000
483
scll cn0ugh I0 pr0vdc csh I0r Ihc blncc
Pr0p0rI0n I0 scll s dcIcrmncd by Ihc I0ll0wng I0rmul
shrcs 3333 shrcs 4000 0I 33 . 83 scll c .
33 . 83
40 . 4
2
c .
ccs Pr RghIs EX l Thc0rcIc
cc Pr 0n SubscrpI
=
=

\luc 0I h0ldng bcI0rc RghIs ssuc 240,000

Scll 3333 @ 2.40 8,000
T0 subscrbc I0 bb7 @ 2.00 8,004
\luc 0I h0ldng IIcr Ihc rghIs ssuc
b,bb7 @ 4.40 240,000
0pI0n (v) 00 n0Ihng
\luc 0I h0ldng bcI0rc Ihc RghIs !ssuc 240,000
\luc 0I h0ldng IIcr Ihc RghIs !ssuc
b,000 @ 4.40 230,400
9,b00
!n cch c0ursc 0I cI0n cxccpI 0pI0n (v), Alh| Hmmcd's wclIh wll n0I chngc. !I s
0nly whcrc hc d0cs n0Ihng IhI hs wclIh w0uld n Ihc0ry, Ill by 9,b00.
(d) SccurIcs nd Exchngc C0mmss0n (SEC). Ncw !ssucs MrkcI, 0r Prmry mrkcI.
(c) !I Alh| Hmmcd hs cc0unI wIh CSCS, shrc ccrIIcIcs n rcspccI 0I Ihc shrcs ll0IIcd
I0 hm wll bc scnI by clccIr0nc IrnsIcr I0 hs CSCS cc0unI (wIhn 5 w0rkng dys
IIcr ll0ImcnI. !I hc d0cs n0I hvc n cc0unI wIh CSCS, hs ccrIIcIc wll bc scnI I0
hm by rcgsIcrcd p0sI.
(I) () Hc cn buy Ihc ddI0nl rghIs 0n Ihc Il00r 0I Ihc Exchngc 0R
() Hc c0mplcIcs Ihc ppr0prIc spcc 0n Ihc AcccpIncc/RcnuncI0n I0rm.
(g) Alh| Hmmcd sh0uld ppr0ch hs sI0ckbr0kcr nd dscuss I0rmlly
wIh hm ll mIIcrs rclIng I0 Ihc rghIs ssuc.
484
Thc currcnI gl0bl Inncl crss hs lcII mny hgh ncIw0rIh ndvduls, c0rp0rIc b0dcs
nd cvcn publc nsIIuI0ns bnkrupI wIh bnks n Ngcr dcspcrIcly nglng I0r dcp0sIs I0
sh0rc up Ihcr blncc shccIs. Thc NI0n Sundy Aprl 2b, 2009.
Thc b0vc sIIcmcnI sums up Ihc currcnI m00d 0I Ihc c0unIry, nI0n n scr0us cc0n0mc
crss whcrc Ihc bnks rc n0I lcII 0uI.
Thc drccI0rs 0I M00n nk Plc, 0nc 0I Ihc ncw nd ggrcssvc gcncrI0n bnks (qu0Icd 0n Ihc
SI0ck Exchngc) rc prIculrly w0rrcd b0uI Ihc cIIccI 0I Ihc gl0bl cc0n0mc mclI d0wn 0n
Ihc prcscnI nd IuIurc pr0spccIs 0I Ihcr bnk. Thcy rc, IhcrcI0rc c0nIcmplIng 0n mcrgcr
wIh vcw I0 rI0nlzng Ihc c0mbncd busncsscs n Ihc I0ll0wng rcs: dcp0sI bsc,
lqudIy, cpIl bsc, humn rcs0urccs, rsk mngcmcnI, brnch ncIw0rk, nd nIcgrIcd
nI0rmI0n Icchn0l0gy. AIIcr n cxIcnsvc nd Ih0r0ugh scrch 0I numbcr 0I bnks, M00n
nk Plc nrr0wcd Ihc cnddIcs I0 0nc SIr nk Plc (0nc 0I Ihc 0ld nd c0nscrvblc gcncrI0n
bnks)qu0Icd 0n Ihc sI0ck mrkcI nd hvng subsInIl m0unI 0I Ircc csh Il0ws. M00n
nk Plc hs mdc n nIl pr0p0sl I0 SIr nk Plc whch s I0 bc dscusscd by Ihc b0rds 0I
drccI0rs 0I Ihc Iw0 bnks. Thc pr0p0sl s IhI M00n nk Plc wll, c0nscqucnI I0 Ihc mcrgcr,
ssuc 0NE 0I Is 0wn shrcs I0r cvcry I0ur shrcs 0I SIr nk Plc. Thc mcrgcr s cxpccIcd I0
pr0ducc syncrgy whch, I s bclcvcd, wll rcsulI n IIcrIx bcncIIs 0I N.2bll0n.
Thc m0sI rcccnI summrzcd Inncl sIIcmcnIs 0I Ihc Iw0 bnks I0r Ihc ycr cndcd 0cccmbcr
3, 2008 rc sh0wn bcl0w:
0r0ss crnngs 80,000 8,000
Pr0II bcI0rc Ix 0,000 ,000
TxI0n 2,000 200
Pr0II IIcr Ix 8,000 800
0vdcnds ,200 200
RcIncd pr0II I0r Ihc ycr b,800 b00
Csh nd sh0rIIcrm Iunds 8,000 2,000
lls dsc0unIcd 3b,000 2,000
L0n nd Advnccs b0,000 4,000
!nvcsImcnIs 24,000 8,000
b,000 2,000
44,000 48,000
0cp0sI lblIcs 00,000 3b,000
0Ihcr lblIcs 24,000 b,000
8,000 4,000
Rcscrvcs 2,000 2,000
44,000 48,000
485
AcccpIncc nd gurnIccs 00,000 2,000
Prcbd prcccrnng (P/E) rI0 20 2
0rdnry shrcs rc 0I 50k cch
Thc mrkcI bclcvcs IhI IIcr Ihc mcrgcr, Ihc P/E rI0 0I M00n nk Plc w0uld bc mnIncd.
() whI s Ihc dIIcrcncc bcIwccn Ihs Iypc 0I mcrgcr nd Ihc prc0cccmbcr 3, 2005
mcrgcrs!
(2) whI s IhI vcry mp0rInI humn IcI0r, n0I spccIclly mcnI0ncd, whch mghI hvc
drc c0nscqucncc 0n Ihc succcss 0r 0Ihcrwsc 0I Ihc mcrgcr!
(3) whI s IhI c0ndI0n whch musI n Ihc0ry, |usIIy Ihc mcrgcr 0I Ihc Iw0 bnks!
(4) Pr0ducc rclcvnI clculI0ns I0 sh0w Ihc Inncl cIIccIs (n Icrms 0I vluc) 0I Ihc
mcrgcr 0n Ihc shrch0ldcrs 0I Ihc Iw0 bnks
(5) whI rgumcnI cn Ihc drccI0rs 0I SIr nk Plc dvncc I0 chcvc bcIIcr Icrms! whI
rgumcnI cn Ihc drccI0rs 0I M00n nk Plc usc I0 c0unIcr SIr nk Plc's p0sI0n!
C0uld ll Ihcsc bc vld!
(b) Cn Ihc nI0rmI0n Icchn0l0gy nIcgrI0n lcd I0 l0ss 0I |0bs IIcr Ihc mcrgcr!
() Thc prc0cccmbcr 2005 mcrgcr s 00vcrnmcnI p0lcy drvcn whlc Ihc mcrgcr undcr
c0nsdcrI0n s syncrgy drvcn.
(2) 0IIcrcnccs n culIurcs 0I Ihc Iw0 0rgnzI0ns.
(3) Thc ncrcmcnIl csh Il0ws Ir0m Ihc mcrgcr, whcn dsc0unIcd I rIc c0nssIcnI wIh
Ihc dcgrcc 0I rsk IIchng I0 Ih0sc csh Il0ws, musI bc p0sIvc.
0R
Thc rcducI0n n Ihc lcvcl 0I rsk c0nnccIcd wIh M00n nk's currcnI csh Il0ws musI
cusc Ihc ppr0prIc dsc0unI rIc I0r dsc0unIng Ih0sc csh Il0ws I0 Ill, Ihus ncrcsng
Ihc ncI prcscnI vluc 0I Ihc cxsIng csh Il0ws 0I M00n nk Plc.
(4) ClculI0n 0I ExpccIcd \luc
Prcmcrgcr prcc pcr shrc 0I M00n nk Plc
EPS = 8bll0n/bbll0n
= 0.50 pcr shrc
\luc pcr shrc = 0.50 x 20
= 0
Prcmcrgcr prcc pcr shrc 0I SIr nk Plc
EPS = 800,000,000/8,000,000,000
= 0.0 pcr shrc
\luc pcr shrc = 0.0 x 2
= .20
48b
C0mbncd IIcr Ixcrnngs 0I Ihc cnlrgcd M00n nk Plc
Prcmcrgcr crnngs - M00n nk Plc 8,000
SIr nk Plc 800
SyncrgsIc cIIccI ,200
T0Il p0sImcrgcr crnngs 0,000
Numbcr 0I shrcs (m)
Prcmcrgcr M00n nk Plc b,000 mll0n
Shrcs ssucd I0 shrch0ldcrs
0I SIr nk Plc 8000/4mll0n 2,000 mll0n
T0Il N0 0I Shrcs n Ihc cnlrgcd M00n nk Plc 8,000 mll0n
P0sImcrgcr EPS 0,000 mll0n/8,000 mll0n = 0.55 0r 5b k0b0 ppr0x.
AI Ihc ncw P/E rI0, cch shrc s w0rIh 20 x 0.5b = .20
EIIccIs Prcmcrgcr vluc 0I p0sI mcrgcr vluc
0I cch shrc 0I cch shrc
M00n nk Plc 0 .20
SIr nk Plc 4.80 (0r N.20) .20 (0r N2.80)
!n Ihc lghI 0I Ihc b0vc, nd ssumng IhI shrc prcc wcrc Ihc 0nly crIcl IcI0r, Ihc
shrch0ldcr 0I b0Ih bnks w0uld bcncII Ir0m Ihc mcrgcr. Thcy rc IhcrcI0rc cxpccIcd,
ll Ihng rcmnng Ihc smc, I0 wclc0mc Ihc mcrgcr.
(5) SIr0ng lqudIy p0sI0n. Csh blncc s pcr blncc shccI s b0uI
33.3 whlc IhI 0I M00n nk Plc s 0nly 8. C0uld bc vld bccusc csh s physcl
(rcl) lIh0ugh vluc c0uld bc cr0dcd by nIlI0n.
SIr0ng AsscIs bsc nd g00d pr0IIblIy. Ths mghI n0I bc Icnblc
s Ihc sscIs vlucs rc bscd 0n b00k (0r cc0unIng) vlucs nd IhcrcI0rc n0I rclblc
s mcsurc 0I pcrI0rmncc. Als0 pr0IIs rc hsI0rcl pr0IIs Thcrc s n0 rcs0n I0
bclcvc IhI Ihs lcvcl w0uld bc susIncd n IuIurc.
(b)
Ycs: Thc nIcgrIcd !T mghI Ikc 0vcr Ihc |0bs 0I mny cmpl0yccs
N0: Thc nIcgrIcd !T mghI crcIc ncw |0bs I0r 0Ihcrs.
H0wcvcr Ihc I0rmcr s lkcly I0 d0mnIc Ihc lIIcr.
0l0bl rcwcrcs Plc s c0mpny n Ihc rcwcrcs sccI0r 0I Ihc cc0n0my nd qu0Icd 0n Ihc
sI0ck cxchngc. Thc c0mpny ws nc0rp0rIcd mny ycrs g0 s prvIc lmIcd lblIy
c0mpny. !I c0nvcrIcd I0 publc lmIcd c0mpny (PLC) n Ihc ycr 2000 nd ws lsIcd 0n Ihc
sI0ck cxchngc n ycr 2005. Thc c0mpny's mnuIcIurng plnI s l0cIcd I 0nc 0I Ihc I0wns
n Ihc S0uIh wcsI 0I Ngcr.
Thc drccI0rs 0I 0l0bl rcwcrcs hvc bccn l00kng nI0 Ihc cpIl cxpcndIurc pln 0I Ihc
c0mpny I0r Ihc ycr 200. Thc pln musI bc rcdy lIcsI by 0cI0bcr 3, 2009 I0 cnblc I I0 bc
nc0rp0rIcd nI0 Ihc c0mpny's MASTER budgcI I0r 200. 0nc crIcl ssuc IhI hs bccn
IcIurng I Ihc vr0us mccIngs 0I Ihc cpIl cxpcndIurc c0mmIIcc 0I Ihc c0mpny s Ihc
cqusI0n 0I sIIc 0I Ihc rI Iully uI0mIcd mnuIcIurng plnI IhI wll bc uscd I0 rcplcc
Ihc cxsIng cqupmcnI b0ughI scvcrl ycrs g0. Thc c0mmIIcc s hcdcd by Ihc ChcI ExccuIvc
487
hmsclI nd hs Ihc Fnncc 0rccI0r, Ihc Tcchncl 0rccI0r, MrkcIng 0rccI0r nd 0Ihcrs s
mcmbcrs. !I s bclcvcd IhI Ihc cqusI0n 0I Ihc mchnc wll gvc Ihc c0mpny subsInIl
c0mpcIIvc dvnIgc nd l0ngrun pr0IIblIy. Thc cpIl cxpcndIurc c0mmIIcc hs dcnIIcd
Iw0 mn pr0blcms n c0nnccI0n wIh Ihc cqusI0n: () Ihc pr0blcm 0I I0rccsIng csh Il0ws
nI0 Ihc dsInI IuIurc nd () Ihc ch0cc 0I Ihc cpIl pr0|ccIs pprsl Icchnquc I0 usc nd
by mplcI0n Ihc ch0cc (whcrc ncccssry) 0I Ihc dsc0unI rIc I0 usc n dsc0unIng Ihc pr0|ccIs
csh Il0ws. whlc Ihc mrkcIng drccI0r nd Ihc c0mpny cc0unInI wll dcl wIh Ihc IrsI
pr0blcm, Ihc Inncc drccI0r wll Ikc crc 0I Ihc scc0nd pr0blcm 0ncc Ihc csh Il0ws rc rcdy.
Thc nIl c0sI w0uld n0I c0nsIIuIc ny pr0blcm s prccs cn bc 0bIncd Ir0m Ihc 0vcrscs
mnuIcIurcrs 0I Ihc plnI. Thc Inncc drccI0r hs cllcd mccIng wIh hs Inncc mngcr
wh0 ncdcnIlly hs |usI rcIurncd Ir0m 0vcrscs scmnr whcrc Ihc 'h0I' I0pc 0I Ihc scmnr
ws Advnccd MnuIcIurng Tcchn0l0gy (AMT) pr0|ccIs. AI Ihc mccIng Ihc Inncc mngcr
I0ld Ihc Inncc drccI0r IhI Ihc chrcIcrsIcs 0I Ihc pr0|ccIs rc such IhI Ihcy II wIh Ihc
chrcIcrsIcs 0I AMT pr0|ccIs nd IhI Ihcy sh0uld usc NcI PrcscnI \luc (NP\) I0r pprsng
Ihc pr0|ccI. Thc Inncc drccI0r dsgrccd wIh hm. H0wcvcr, hc lIcr I0ld hm I0 g0 nd usc
b0Ih Icchnqucs buI IhI hc sh0uld bc prcprcd I0 gvc Ihc c0mmIIcc rcs0ns I0r Ihc ch0cc 0I
hs Icchnquc. Acc0rdng I0 hm Ihc c0mpny's p0lcy, whch hs bccn n 0pcrI0n I0r mny
ycrs, s I0 pprsc pr0|ccIs usng pybck pcr0d 0I 5 ycrs I0r ll pr0|ccIs.
Y0u hvc Ihc I0ll0wng rclcvnI csh Il0ws I0r Ihc pr0|ccI pr0vdcd I0r y0u by Ihc c0mpny's
cc0unInI.
0 (00)
(80)
2 0
3 30
4 40
5 50
b b0
7 70
8 80
9 90
0 00
() SIIc Tw0 chrcIcrsIcs 0I AMT pr0|ccIs
(2) Thc mnuIcIurng ndusIry hs ccuscd Inncl mngcrs 0I bcng bscd gnsI
AMT pr0|ccIs. 0vc Tw0 rcs 0I cpIl nvcsImcnI pprsl IhI mghI supp0rI, Ihc
llcgI0n 0I bs gnsI AMT pr0|ccIs.
(3) EvluIc Ihs pr0|ccI usng
() Pybck pcr0d nd 5 ycrs pybck pcr0d bcnchmrk.
() NcI prcscnI vluc Icchnquc, ssumng 5 pcr ccnI shrch0ldcrs 0pp0rIunIy
c0sI 0I Iunds
(4) 0vc Tw0 pr0blcms ss0cIcd wIh Ihc usc 0I NP\ Icchnquc n cvluIng AMT pr0|ccIs.
(5) SIIc whI cI0n Ihc c0mpny cn Ikc n Ihc rcs 0I
() g0l c0ngrucncc, nd
() mngcmcnI IIIudc I0 cnsurc IhI Ihc s0cllcd bs gnsI AMT pr0|ccIs s
rcduccd.
488
() () !nIl m0unI 0I nvcsImcnI rc usully vcry hgh nd my bc sprcd sy 0vcr
2 ycrs 0r m0rc.
(b) Csh Il0ws rc gcncrIcd 0vcr vcry l0ng pcr0d 0I Imc.
(2) () Thc usc 0I nc0rrccI pprsl Icchnqucs.
(b) Thc nc0rrccI usc 0I Ihc rghI Icchnquc.
(3)
()
End 0I ycr Csh Fl0ws CumulIvc Csh Fl0w
m m
0 (00) (00)
(80) (80)
2 (80
3 30 (50)
4 40 (0)
5 50 (b0)
b b0
7 70 70
TrgcI pybck pcr0d 5 ycrs
Pr0|ccI pybck pcr0d b ycrs
0ccs0n: RE1ECT
() NP\ mcIh0d
End 0I ycr Csh Fl0ws 0sc0unI FcI0r P\
M 5 M
0 (00) .0 (00)
(80) 0.870 (b9.b)
2 0.75b
3 30 0.b58 9.74
4 40 0.572 22.88
5 50 0.497 24.85
b b0 0.432 25.92
7 70 0.37b 2b.32
8 80 0.327 2b.b
9 90 0.284 25.5b
0 00 0.247 24.70
NP\ 2b.53
(4) ()
!n vcw 0I Ihc nIurc 0I AMT pr0|ccI, mny l0ngIcrm nd vlublc bcncIIs
mghI n0I bc cpIurcd.
()
Tngblc bcncIIs mghI bc nc0rrccIly sscsscd whlc mcsurcmcnI 0I nIngblc
bcncIIs mghI bc hghly sub|ccIvc.
C0mpny's AcI0n rcqurcd I0r rcducI0n 0I bs.
489
(5) ()
T0p mngcmcnI sh0uld cnsurc IhI ndvdul mngcrs' 0b|ccIvcs rc lgncd s
much s p0ssblc wIh Ihc sIrIcgc g0l 0I Ihc c0mpny.
()
Thc IIIudcs 0I mngcmcnI sIII I ll lcvcls sh0uld n0I bc ncgIvc. F0r cxmplc
mnInng Ihc 'sIIus qu0' 0r |usI hvng Ihc bclcI IhI ncw mcIh0ds 0I d0ng Ihngs
cnn0I w0rk sh0uld bc I0Illy rcm0vcd Ir0m Ihc psychc 0I mngcrl sIII I ll lcvcls.
MACKAY Engnccrng Plc s mcdumszcd wIcr cngnccrng c0mpny cnggcd n Ihc pr0vs0n
0I b0rch0lcs I0 vr0us c0mmunIcs n ncrly ll Ihc sIIcs 0I Ihc FcdcrI0n nd Fcdcrl CpIl
TcrrI0ry (FCT). Thc c0mpny bd I0r c0nIrcI Ihrcc m0nIhs g0 nd hs |usI rcccvcd lcIIcr 0I
Awrd I0r Ihc c0nIrcI. C0nscqucnIly Ihc mngng 0rccI0r cllcd IrprIIc mccIng nv0lvng
hmsclI, Ihc Icchncl drccI0r nd Ihc Inncc drccI0r. Thc I0ll0wng c0nvcrsI0n wcnI 0n
m0ng Ihc Ir0.
C0ngrIulI0ns gcnIlcmcn. wc hvc rcccvcd LcIIcr 0I Awrd n rcspccI 0I Ihc c0nIrcI wc
bddcd I0r n 1nury, Ihc sIIc g0vcrnmcnI hs wrdcd Ihc c0nIrcI I0 0ur c0mpny I0r Ihc
sum 0I 25mll0n.
Sr, Ihs s g00d ncws, buI wc ddn'I hvc Ihc spccl cqupmcnI rcqurcd I0r Ihc |0b. !I s
Irly bg pr0|ccI. Thc lsI Imc ! wcnI I0 T0LT cngnccrng, Ihc prcc Ig 0n Ihc mchnc ws
4.5m - csh nd crry
wc cn cqurc Ihc cqupmcnI. 0ncc wc buy Ihc cqupmcnI, I bcc0mcs 0ur 0wn
Sr IhI wll n0I bc pr0blcm wc sIll hvc lnc 0I crcdI wIh UnIcd nk I0r AIrc. 0ur N5m
lnc 0I crcdI cn sIll cc0mm0dIc Ihc c0sI 0I Ihc cqupmcnI. F0rIunIcly Ihcrc s cclng 0n
nIcrcsI rIc n0w. Thnks I0 Ihc CN's drccIvc n Ihs rcspccI.
Thcsc bnks, n0 mIIcr whI Ihc CN sys, wll sIll cnsurc IhI wc py ccrIn un0IIcl (undcr
Ihc Iblc) chrgcs. Thcy rc vcry clcvcr. wc wll cnd up pyng Ihr0ugh 0ur n0sc.
Sr, I IhI s Ihc csc, Ihcrc s Ihs lcsng c0mpny I 0b Akrn Avcnuc !kc|. wc cn ls0 Ilk
I0 Ihcm. Thcr mngng drccI0r s my Ircnd. ! kn0w Ihc c0mpny sh0uld bc blc I0 sssI us by
wy 0I lcsng IclIy
0ky, I mcns wc n0w hvc s0mc lccwy, Ihc 0pI0n I0 lcsc 0r I0 buy
Thc I0ll0wng dy, Ihc Inncc drccI0r c0nIcIcd Ihc lcsng c0mpny whch hs 0IIcrcd Ihc
IclIy 0I Inncl lcsc I0r Ivc ycrs. Annul lcsc pymcnI 0I m wll bc mdc wIh
pymcnI I Ihc bcgnnng 0I cch ycr. !I Ihc c0mpny's lnc 0I crcdI s uscd, Ihc bnk wll lcnd
I0 Ihc c0mpny I n cIIccIvc rIc 0I 20 pcr nnum bcI0rc Ix. Thc cqupmcnI wll hvc
gurnIccd slvgc vluc 0I 500,000 IIcr Ivc ycrs. Thc m0unI spcnI n Ihc purchscs 0I Ihc
cqupmcnI wll IIrcI 50 pcrccnI nIl ll0wncc nd 25 pcrccnI nnul ll0wncc 0n rcducng
490
blncc bss. !I Ihc cqupmcnI s cvcnIully lcscd Ihc slvgc vluc wll ccruc I0 Ihc lcsscc.
Thc c0mpny pys Ix I Ihc rIc 0I 30 pcrccnI. PymcnI 0I Ix rc mdc 2 m0nIhs n rrcrs.
() !s Ihc 0pI0n rclly 0nc 0I lcsc 0r buy! whI s Ihc mplcI0n 0I y0ur nswcr I0r
dccs0ns 0I Ihs Iypc!
(2) whI s 'Inncl lcsc'!
(3) Expln, brcIly, Ihc Icrm lnc 0I crcdI
(4) Advsc whcIhcr Ihc c0mpny sh0uld lcsc 0r buy Ihc cqupmcnI!
() Thc 0pI0n s n0I 0nc 0I lcsc 0r buy. !I s b0uI, ch00sng Ihc chcpcr mcIh0d 0I
Inncng Ihc cqupmcnI. EIhcr I0 Inncc Ihr0ugh lcsng 0r I0 b0rr0w Ir0m, sy, Ihc
bnk nd cqurc Ihc sscI 0uIrghI. Thc mplcI0n s IhI vIl qucsI0n musI bc
skcd. !s lcsng n lIcrnIvc I0 b0rr0wng! !I I s, Ihcn Ihc dsc0unI rIc IhI sh0uld
bc uscd I0r dsc0unIng Ihc lcsc pymcnIs s Ihc IIcrIx c0sI 0I b0rr0wng.
(2) A Inncl lcsc s n0ncnccllblc l0ngIcrm c0nIrcI n whch Ihc pcr0d 0I Ihc
c0nIrcI c0ncdcs wIh Ihc cc0n0mc lIc 0I Ihc sscI bcng lcscd.
(3) An grccmcnI whch c0mpny nI0rmlly rcchcs wIh Is bnk ndcIng Ihc mxmum
m0unI 0I sccurcd/unsccurcd crcdI I0 whch Ihc c0mpny c0uld hvc cccss I ny 0nc
Imc.
(4) w0rkngs
CpIl All0wnccs !nIl All0wncc Annul All0wncc
Ycr 50 25
'000 '000
2,250 5b2.50
2 42.87
3 3b.38
4 237.28
5 77.9b
'000
wrIIcn 00wn \luc n = 534.0
Slvgc \luc = 500.00
lncng Chngc = 34.0
49
0 (4,500) (4,500) .000 (4500.00)
2,82.50 0.877
2 42.87 843.75 843.75 0.7b9 b48.84
3 3b.38 2b.5b 2b.5b 0.b75 85.43
4 237.28 94.9 94.9 0.592 5b.9
5 77.9b 7.8 7.8 0.59 29b.44
34.0* 500.00
b 53.39 b3.59 0.45b 29.00
0.20
*lncng ll0wncc
NP\ 0I c0sI = 3,384,00
0 000 (000) .000 (,000.00)
000 300 (700) 0.877 (b3.90)
2 000 300 (700) 0.7b9 (538.30)
3 000 300 (700) 0.b75 (472.50)
4 000 300 (700) 0.592 (44.40)
5 300 300 0.59 55.70
!I s chcpcr I0 Inncc Ihc cqupmcnI by lcsc s gnsI buyng I 0uIrghI. Thc dccs0n
IhcrcI0rc, sh0uld bc I0 lcsc Ihc cqupmcnI.
493
: Ths s dccs0n n Ihc pr0|ccIs cvluI0n pr0ccss whcrcby Ihc
vluc puI 0n pr0|ccI s Ihc vluc I0 bc 0bIncd I Ihc pr0|ccIs' sscIs wcrc I0 bc s0ld cxIcrnlly.
Ths s Ihc ddI0n 0I Ihc prcscnI vluc 0I Ihc 0pcrIng csh
Il0ws 0I n nvcsImcnI (whcrc s0lcly Innccd by cquIy) nd Ihc prcscnI vluc 0I rclIcd Inncl
cIIccIs.
C0sIs IhI mghI bc ncurrcd n m0nI0rng Ihc cIvIcs 0I Mngcrs I0 cnsurc
IhI Ihcr cI0ns rc n lnc wIh Ihc 0b|ccIvcs 0I Ihc shrch0ldcrs wh0 puI Ihcm Ihcrc.
Ths s Ihc0ry whch Ircs I0 cxpln, n prncplc, Ihc c0nducI 0I mngcrs
(s gcnIs) n rclI0n I0 Ihcr shrch0ldcrs (prncpls).
: A Iblc sh0wng Ihc rcpymcnI pr0grmmc 0I l0n whcrcby cch
nsIlmcnI s Ixcd m0unI nd c0mprscs b0Ih prncpl nd nIcrcsI nccdcd I0 c0mplcIcly
rcdccm Ihc l0n I mIurIy.
Ths s scrcs 0I cqul m0unIs 0I m0ncy I0 bc pd 0r rcccvcd cch ycr I0r
spccIcd IuIurc pcr0d 0I Imc. !I Ihc pymcnI 0r rcccpI s mdc I Ihc cnd 0I cch ycr, I s
kn0wn s 0rdnry nnuIy. !I Ihc pymcnI rcccpI s mdc I Ihc bcgnnng 0I cch ycr, I s
cllcd nnuIy duc.
Scrchng I0r Iw0 smlr sscIs hvng dIIcrcnI prccs nd buyng n Ihc mrkcI
whcrc Ihc prcc s l0w nd smulInc0usly scllng n mrkcI whcrc Ihc prcc s hgh n 0rdcr I0
mkc sh0rIIcrm rsklcss pr0IIs.
Ths s Ihc0ry 0I sscI prcng nv0lvng m0rc Ihn 0nc
IcI0r nd rbIrgc cIIccncy h0lds.
Ths s nI0rmI0n whch Ihc drccI0rs hvc buI n0I mdc vlblc
I0 Ihc mrkcI. !I I s ncgIvc nI0rmI0n, Ihc drccI0rs mghI wnI I0 supprcss I I Ihcy kncw I
ws g0ng I0 dvcrscly IIccI Ihcm.
A pymcnI 0I dcbI whch s Ihc lrgcsI 0I ll Ihc pymcnIs nd usully Ihc
wh0lc cpIl rcpymcnI 0n mIurIy.
A ncg0Iblc Imc drII drwn 0n nd cccpIcd by spccIcd bnk I0 bc
pd I mIurIy.
An ssuc 0I sccurIy n whch Ihc !ssung H0usc grccs I0 usc 0nly Is bcsI
cII0rIs I0 scll Ihc ssung c0mpny's sccurIcs.
A mcsurc 0I Ihc sysIcmIc rsk 0I shrc. Usully wrIIcn s , I mcsurcs Ihc dcgrcc 0I
rcsp0nsvcncss 0I shrc's rcIurn I0 spccIcd pcrccnIgc chngc n Ihc mrkcI ndcx rcIurn.
Thc bcI 0I p0rII0l0 s |usI Ihc wcghIcd vcrgc 0I Ihc ndvdul shrc's bcIs n Ihc p0rII0l0.
L0ngIcrm dcbI sccurIy ssucd by g0vcrnmcnI 0r c0mpny.
Als0 kn0wn s cc0unIng vluc, Ihs s Ihc 0rgnl c0sI 0I n sscI lcss dcprccI0n
I0 dIc.
Ths s Ihc nhcrcnI rsk rsng Ir0m Ihc vrblIy 0I Ihc c0mpny's csh Il0ws
Ir0m Is cIvIcs.
494
Thc rghI I0 buy spccIcd qunIIy 0I n sscI I prcc dcIcrmncd n0w, kn0wn
s cxcrcsc prcc, durng Ixcd IuIurc pcr0d 0I Imc. Thc rghI lpscs I n0I cxcrcscd 0n 0r
bcI0rc Ihc cxpry dIc.
A m0dcl IhI rclIcs Ihc sysIcmIc rsk 0I sccurIy I0
Ihc cxpccIcd 0r rcqurcd rcIurn 0I IhI sccurIy. Thc m0dcl rcc0gnscs Ihc cxsIcncc 0I rskIrcc
rIc (usully Ihc Trcsury ll rIc) nd IhI Ihc cxpccIcd 0r rcqurcd rcIurn 0I sccurIy s Ihc
sum 0I Ihc rskIrcc rIc nd prcmum bscd 0n Ihc sccurIy's sysIcmIc rsk.
Thc pr0ccss 0I cvluIng ll p0ssblc nvcsImcnI lIcrnIvcs wh0sc csh
Il0ws rc cxpccIcd I0 0ccur bcy0nd 0nc ycr wIh vcw I0 Indng Ihc prcIcrrcd lIcrnIvcs.
Als0 kn0wn s cpIl pprccI0n (dcprccI0n). !I s Ihc cxccss (0r
sh0rIIll) 0I Ihc scllng prcc 0I cpIl sscI 0vcr (0r Ir0m) Is 0rgnl c0sI.
Thc dsc0unI rIc IhI s pplcd I0 sIrcm 0I cxpccIcd IuIurc csh Il0ws
n 0rdcr I0 dcIcrmnc Ihcr prcscnI vlucs. FrcqucnIly uscd I0 dcIcrmnc Ihc prcscnI vluc 0I
c0nsInI pcrpcIul IuIurc csh Il0ws.
Thc mrkcI I0r Inncl sscIs wh0sc 0rgnl mIurIy pcr0ds rc usully
m0rc Ihn 0nc ycr. (F0r cxmplc shrcs nd dcbcnIurcs).
RcsIrcI0ns 0n gl0bl Il0ws 0I cpIl I0r cxmplc, Ixcs 0r mp0rI qu0Ics.
Lrgc 0uIIl0ws 0I nvcsImcnI c0nnccIcd wIh ncrcscd rsk n c0unIry
: A c0ndI0n whcrcby n uppcr lmI s puI 0n Ihc I0Il m0unI 0I m0ncy
IhI c0uld bc spcnI durng prIculr pcr0d.
Thc pr0p0rI0n 0I Ihc I0Il l0ngIcrm Inncng 0I c0mpny rcprcscnIng
l0ngIcrm dcbI, prcIcrcncc shrcs nd 0rdnry shrcs rcspccIvcly.
Thc pcr0d 0I Imc Ir0m Ihc c0mmImcnI 0I csh 0n purchscs I0 Ihc rcccpI 0I csh
Ir0m dcbI0rs mnus Ihc crcdI pcr0d Ikcn Ir0m supplcrs.
A pcrccnIgc rcducI0n n Ihc slcs prcc ll0wcd by scllcr (gvcn I0 Ihc cusI0mcr)
I0r crly scIIlcmcnI 0I nv0ccs.
Thc pcr0d 0I Imc gvcn I0 Ihc cusI0mcr I0 py n 0rdcr I0 Ikc dvnIgc
0I csh dsc0unI.
Csh dsIrbuI0n 0I pr0IIs I0 shrch0ldcrs.
Hghly lqud, sh0rIIcrm nvcsImcnIs IhI cn rcdly bc c0nvcrIcd nI0
csh I lIIlc 0r n0 l0ss I0 Ihc h0ldcr.
A rcIlccI0n 0I IIIudc I0 rsk, I s Ihc m0unI 0I csh n ndvdul
w0uld rcqurc wIh ccrInIy IhI wll mkc hm I0 bc ndIIcrcnI whcn IhI ccrIn m0unI s
c0mprcd wIh n0Ihcr m0unI IhI s bcng cxpccIcd wIh rsk, b0Ih m0unI 0ccurrng I Ihc
smc p0nI n Imc.
A lnc dcpcIng Ihc rclI0nshp bcIwccn n ndvdul sccurIy's rcIurns
nd rcIurns 0n Ihc mrkcI p0rII0l0. cI s Ihc nmc gvcn I0 Ihc sl0pc 0I Ihs lnc.
F0rccsIcrs wh0 usc Ihc psI pIIcrns 0I m0vcmcnI n sscI prccs I0 prcdcI IuIurc
m0vcmcnIs.
495
An uI0mIcd clcrng sysIcm uscd
bsclly I0r gl0bl pymcnIs.
A mcsurc 0I rclIvc rsk, I cxprcsscs Ihc rclI0nshp bcIwccn Ihc
sIndrd dcvI0n 0I dsIrbuI0n nd Ihc mcn 0I IhI dsIrbuI0n.
Sh0rIIcrm unsccurcd pr0mss0ry n0Ics usully ssucd by lrgc c0mpncs.
Usully chrgcd n rcv0lvng crcdI rrngcmcnI, I s Icc chrgcd by Ihc
lcndcr I0r grccng I0 mkc crcdI vlblc up I0 spccIcd m0unI Ihr0ugh0uI Ihc durI0n 0I
Ihc rrngcmcnI.
: !nIcrcsI chrgc 0n nIcrcsI prcv0usly crncd.
C0nvcrs0n Prcc: Thc prcc I whch 0rdnry shrcs wll bc cxchngcd I0r c0nvcrIblc sccurIy.
!I s Ihc pr vluc 0I Ihc c0nvcrIblc sccurIy dvdcd by Is cxchngc rI0.
Thc numbcr 0I 0rdnry shrcs nI0 whch c0nvcrIblc sccurIy cn bc
c0nvcrIcd. !I s Ihc pr vluc 0I Ihc c0nvcrIblc dvdcd by Ihc c0nvcrs0n prcc.
Thc numbcr 0I 0rdnry shrcs nI0 whch c0nvcrIblc sccurIy cn bc
c0nvcrIcd Imcs Ihc currcnI mrkcI prcc 0I Ihc c0mpny's shrc.
A dcbcnIurc 0r prcIcrcncc shrc whch cn bc c0nvcrIcd nI0 Ihc 0rdnry
shrcs 0I Ihc ssung c0mpny I spccIcd IuIurc Imc I Ihc 0pI0n 0I Ihc h0ldcr.
A sIIsIcl mcsurc 0I Ihc lncr rclI0nshp bcIwccn Iw0 vrblcs
I0r cxmplc rcIurns 0n Iw0 sccurIcs 0I Iw0 dIIcrcnI c0mpncs.
Thc nIcrcsI rIc sIIcd n Ihc ssuc 0I IxcdnIcrcsI sccurIy. Als0 kn0wn s
n0mnl rIc 0I nIcrcsI.
A sIIsIcl mcsurc 0I Ihc dcgrcc I0 whch Iw0 vrblcs (I0r cxmplc, rcIurns 0n
Iw0 sccurIcs)
A rcsIrcI0n puI n l0n grccmcnI by Ihc lcndcr lmIng Ihc p0wcr 0I Ihc drccI0rs
I0 d0 ccrIn Ihngs. F0r cxmplc dhcrcncc I0 spccIcd lqudIy rI0.
uyng nd scllng Inncl sscIs nIcrnI0nlly nd usng Ihc
I0rwrd c0nIrcI I0 clmnIc Ihc unccrInIy n IuIurc cxchngc rIc s0 s I0 Ikc dvnIgc 0I
Ihc nIcrcsI rIc dIIcrcnIl.
Thc lsIng 0I 0rdnry shrcs 0n Iw0 0r m0rc sI0ck cxchngcs
Thc mplcd Ihrd cxchngc rIc whcrc Ihcrc rc Ihrcc currcnccs buI 0nly Iw0
cxchngc rIcs.
Thc rghI I0 buy 0r scll spccIcd m0unI 0I I0rcgn currcncy I s0mc
spccIcd prcc bcI0rc prIculr dIc.
A c0nIrcI whcrc Iw0 c0unIcrprIcs cxchngc sIrcms 0I nIcrcsI pymcnIs n
dIIcrcnI currcnccs I0r spccIcd pcr0d 0I Imc nd cxchngc prncpl m0unIs n Ihc rcspccIvc
currcnccs (I prcdcIcrmncd cxchngc rIc) I mIurIy.
An cxchngc 0I dcbI I0r Ihc dcbI0r's h0mc currcncy whch s Ihcn uscd I0
49b
purchsc cquIy shrcs n Ihc dcbI0r's c0unIry.
A mrkcI wIh mny buycrs nd scllcrs ncludng Ihc sccurIcs b0ughI nd s0ld
such IhI Irdng 0ccurs I ll Imcs.
A Inncl c0nIrcI wh0sc vluc dcpcnds 0n Ihc vluc 0I 0nc 0r m0rc
undcrlyng sscIs (I0r cxmplc sccurIy), nIcrcsI rIcs, cxchngc rIcs 0r 0Ihcr ndccs.
A rcducI0n n Ihc pr0p0rI0nl nIcrcsI n c0mpny rsng Ir0m Ihc ssuc 0I ncw
sccurIy.
A mcIh0d 0I qu0Ing n cxchngc rIc n whch spccIcd numbcr 0I unIs 0I
d0mcsIc currcncy wll cxchngc 0nc unI 0I I0rcgn currcncy.
: Any Icchnquc 0I cpIl pr0|ccI cvluI0n nd sclccI0n whch
IcI0rs Ihc Imc vluc 0I m0ncy nI0 csh Il0ws.
!nIcrcsI rIc uscd n c0nvcrIng IuIurc csh Il0ws I0 Ihcr
prcscnI vluc cquvlcnIs.
A mx 0I sccurIcs IhI rcduccs Ihc nvcsI0r's rsk.
Scllng p0rI0n 0I c0mpny s wh0lc.
Thc pr0p0rI0n 0I Ihc c0mpny's crnngs IhI s pd 0uI I0 shrch0ldcrs
s csh. N0rmlly cxprcsscd s dvdcnd pcr shrc dvdcd by crnngs pcr shrc.
ExpccIcd nnul dvdcnd dvdcd by Ihc mrkcI prcc 0I Ihc shrc.
A sgncd wrIIcn 0rdcr wrIIcn nd sgncd by 0nc prIy nd gvcn I0 Ihc scc0nd prIy
nsIrucIng hm I0 py spccIcd sum 0I m0ncy I0 Ihrd prIy 0r I0 hmsclI. Thcsc prIcs rc
Ihc drwcr, Ihc drwcc nd Ihc pycc rcspccIvcly.
A pr0ccdurc I0r buyng nd scllng sccurIcs nd I0rcgn cxchngc
nmcd IIcr sysIcm uscd I0r Il0wcr ucI0ns n Ihc NcIhcrlnds. uycrs mkc bds qu0Ing
prccs I whch Ihcy wnI I0 buy buI n0I qu0Ing bcl0w Ihc mnmum scI prcc. All0cI0ns 0I
sccurIcs 0r I0rcgn currcncy wll bc mdc I Ihc l0wcsI prcc IhI clcrs Ihc I0Il m0unI supplcd
I0 Ihc mrkcI.
Pr0IIs IIcr Ix dvdcd by Ihc numbcr 0I 0rdnry shrcs 0uIsIndng.
Chngcs n Ihc vluc 0I Ihc Irm rsng Ir0m chngcs n cxchngc rIcs.
Thc 0rdcr qunIIy 0I sI0ck IhI mnmscs Ihc I0Il nvcnI0ry
c0sIs 0I Ihc Irm 0vcr Is plnnng pcr0d.
Thc dvnIgcs 0I szc n whch Ihc vcrgc unI c0sI rcduccs s v0lumc
ncrcscs.
Thc n0mnl rIc 0I nIcrcsI IIcr d|usIng I0r such IcI0rs s
numbcr 0I c0mp0undng pcr0ds pcr nnum.
A Inncl mrkcI n whch ll vlblc rclcvnI nI0rmI0n s
Iully nd nsInInc0usly rcIlccIcd n Ihc currcnI prccs.
497
A p0rII0l0 0I sccurIcs IhI gvcs Ihc hghcsI cxpccIcd rcIurn I0r gvcn
lcvcl 0I rsk 0r Ihc l0wcsI lcvcl 0I rsk I0r spccIcd lcvcl 0I rcIurn.
Thc cxchngc 0I busncss nI0rmI0n clccIr0nclly
ncludng 0vcr Ihc nIcrncI.
Thc m0vcmcnI 0I busncss nI0rmI0n n c0mpuIcr
rcdblc I0rmI
: Thc m0vcmcnI 0I nI0rmI0n clccIr0nclly bcIwccn Iw0
dcp0sIIkng Inncl nsIIuI0ns rcsulIng n IrnsIcr 0I vluc (m0ncy).
!ssuc 0I subsdry's shrcs I0 Ihc publc n whch Ihc prcnI c0mpny sIll
rcIns m|0rIy nIcrcsIs.
Thc nmc d0pIcd I0r Ihc snglc Eur0pcn Currcncy wh0sc 0IIcl bbrcvI0n s EUR nd
symb0l s _
A bnk IhI Ikcs dcp0sIs nd grnI l0ns nd dvnccs n I0rcgn currcnccs.
A b0nd ssucd l0clly, dcn0mnIcd n I0rcgn currcncy buI s0ld n c0unIry 0Ihcr
Ihn Ihc c0unIry n whch Ihc b0nd's currcncy s dcn0mnIcd
0cp0sIs 0I currcncy 0uIsdc Is c0unIry 0I 0rgn.
0cp0sIs 0I US d0llrs n bnk 0uIsdc UnIcd SIIcs.
Thc prcc 0I 0nc c0unIry's currcncy n Icrms 0I n0Ihcr c0unIry's currcncy.
Thc prcc I whch 0rdnry shrcs undcrlyng wrrnI 0r cll 0pI0n cn bc
b0ughI 0vcr spccIcd pcr0d.
Thc wcghIcd vcrgc 0I ll p0ssblc rcIurns wIh Ihc wcghIs bcng Ihcr
pr0bblIcs 0I 0ccurrcncc.
Thc wcghIcd vcrgc 0I ll p0ssblc vlucs wIh Ihc wcghIs bcng Ihcr
pr0bblIcs 0I 0ccurrcnccs.
Thc IrsI dIc 0n whch Ihc buycr 0I shrcs n0 l0ngcr gcIs Ihc rghI I0 subscrbc
I0 ddI0nl shrcs gvcn by Ihc rghIs ssucs IhI s |usI nn0unccd.
Thc slc 0I dcbI0rs cc0unIs I0 Inncl nsIIuI0n 0r Irms (IcI0ry) whch ssumcs
rcsp0nsblIy I0r c0llccI0n.
TrnsIcr 0I Inncl nI0rmI0n clccIr0nclly
bcIwccn c0mpny nd Is bnk, 0r bcIwccn bnks.
Thc nIcpIcd cIIccI 0I nIlI0n 0n nIcrcsI rIc.
: A rIc 0I nIcrcsI lnkcd I0 prIculr ndcx n Ihc cc0n0my, I0r cxmplc, lnkcd
I0 m0vcmcnI n Ihc M0ncIry P0lcy RIc (MPR)
C0sIs n c0nnccI0n 0I Ihc ssuc 0I sccurIcs such s lcgl Iccs, cc0unIncy
Iccs, !ssung H0usc Iccs nd s0 0n.
498
A c0nIrcI I0r Ihc dclvcry 0I I0rcgn currcncy 0r sccurIy I prcc dcIcrmncd
I0dy, wIh dclvcry nd scIIlcmcnI I spccIcd IuIurc dIc.
A c0nIrcI I0r Ihc dclvcry 0I I0rcgn currcncy 0r Inncl sscI, I prcc
Ixcd n0w, 0n spccIcd IuIurc rIc. 0IIcrcnI Ir0m I0rwrd c0nIrcI n IhI Ihcy rc Irdcd n
0rgnscd sI0ck cxchngcs nd cn IhcrcI0rc bc csly IrnsIcrrcd.
C0nvcrIng publc c0mpny bck I0 prvIc c0mpny v Ihc buyng bck 0I
shrcs by prcscnI mngcmcnI nd/0r 0uIsdc prvIc nvcsI0rs.
Tkng cI0n IhI hs Ihc p0IcnIl 0I rcducng Ihc rsk 0I
vrI0ns n IuIurc prccs.
: pr0ccss 0I Inncng cch sscI wIh Inncng nsIrumcnI 0I Ihc
smc mIurIy.
Thc mnmum cxpccIcd rIc 0I rcIurn 0n pr0|ccI IhI wll lcvc Ihc vluc 0I Ihc
Irm unchngcd.
Ec0n0mc d|usImcnIs I0rccd 0n c0unIry by Ihc !MF bcI0rc such
c0unIry c0uld gcI !MF l0n.
Thc IrsI ssuc 0I 0rdnry shrcs 0I c0mpny I0 Ihc nvcsIng
publc.
Chngc n Ihc mrkcI prcc 0I IxcdnIcrcsI sccurIy rsng Ir0m chngcs
n nIcrcsI rIc.
Thc nIcrcsI rIc whch dsc0unIs Ihc IuIurc ncI csh Il0ws 0I
pr0|ccI such IhI Ihc prcscnI vlucs 0I Ihcsc csh Il0ws rc n ggrcgIc, cxcIly cqul I0 Ihc
pr0|ccI's nIl nvcsImcnI
A lnc c0mprsng ll c0mbnI0ns 0I cxpccIcd rcIurn nd rsk IhI gvcs
n nvcsI0r cqul m0unI 0I sIsIcI0n.
A pr0ccss 0I csImIng n unkn0wn numbcr IhI lcs s0mcwhcrc bcIwccn Iw0
kn0wn numbcrs
Ths s Ihc Iruc vluc 0I sccurIy. whI Ihc prcc 0I Ihc sccurIy sh0uld bc
bscd 0n Ihc c0mpny's IundmcnIls.
A mcIh0d 0I sI0cks mngcmcnI nd c0nIr0l n whch sI0cks rc cqurcd
nd puI nI0 pr0ducI0n I Ihc cIul Imc Ihcy rc nccdcd such IhI sI0ck lcvcls Icnd I0 bc zcr0
I ll Imcs.
A lcsc c0nIrcI whcrcby Ihc lcss0r pr0vdcs ccrIn pcrccnIgc 0I Ihc
c0sI 0I Ihc lcscd sscI nd Ihrd prIy pr0vdcs Ihc blncc s l0n I0 Ihc lcss0r.
An un0IIcl rrngcmcnI whcrcby bnk grccs I0 ll0w Is cusI0mcr I0 drw
m0ncy up I0 spccIcd mxmum m0unI s unsccurcd crcdI I ny p0nI n Imc.
A sIuI0n whcrc subsInIl v0lumc 0I sccurIcs c0uld bc
s0ld n Ihc scc0ndry mrkcI wIhn sh0rI pcr0d 0I Imc I lIIlc 0r n0 l0ss.
An undcrIkng by b0rr0wcr n0I I0 crcIc lcn 0n ny 0I Ihc sscIs 0I Ihc
c0mpny.
499
A lcsc whcrc Ihc lcsscc mnIns nd nsurcs Ihc lcscd sscIs.
Thc pcr0d 0I Imc Ir0m Ihc c0mmImcnI 0I csh 0n purchscs I0 rcccpI 0I
csh dcbI0rs.
Thc c0sI 0I l0sI 0pp0rIunIy, IhI s, IhI Ihng IhI s l0sI by n0I Ikng Ihc
ncxI bcsI nvcsImcnI lIcrnIvc.
Askng n 0uIsdc c0nIrcI0r I0 supply 0r pr0ducc s0mcIhng I0r Ihc Irm nsIcd
0I d0ng I nh0usc.
Thc rghI I0 buy, 0n pr0 rI bss, n unsubscrbcd shrcs n
rghIs ssuc.
Thc pcr0d 0I Imc nccdcd I0r Ihc cumulIvc cxpccIcd csh Il0ws
Ir0m pr0|ccI I0 cqul Ihc nIl csh 0uI Il0w.
A dcIcnsvc IcIcs uscd by c0mpny I0 mkc IsclI lcss IIrcIvc I0 p0IcnIl
cqurcr.
Thc mrkcI prcc 0I c0mpny's 0rdnry shrc dvdcd by Ihc m0sI
rcccnI 0nc ycr 0I crnngs pcr shrc.
sh0rIIcrm nIcrcsI rIc chrgcd by bnks I0 Ihcr hgh ncIw0rIh cusI0mcrs wIh
lIIlc 0r n0 rsk.
A scI 0I p0ssblc 0uIc0mcs 0I rnd0m vrblc I0gcIhcr wIh
pr0bblIcs 0I 0ccurrcncc.
A lcgl pr0msc I0 py sum 0I m0ncy I0 lcndcr.
Thc rghI I0 scll spccIcd qunIIy 0I n sscI I prcc dcIcrmncd n0w,
kn0wn s Ihc cxcrcsc prcc durng Ixcd IuIurc pcr0d 0I Imc. Thc rghI lpscs I n0I cxcrcscd
0n 0r bcI0rc Ihc cxpry dIc.
Thc Inncl subsdry 0I prcnI c0mpny IhI buys cxp0rIcd g00ds
Ir0m subsdrcs 0I Ihc c0mpny, nd rcsclls Ihcm I0 0Ihcr subsdrcs 0r 0Ihcr prIcs 0uIsdc
Ihc gr0up.
A shrc splI n whch Ihc numbcr 0I shrcs 0uIsIndng s rcduccd.
A I0rml lcgl grccmcnI I0 ll0w crcdI up I0 s0mc mxmum
m0unI 0vcr spccIcd pcr0d 0I Imc.
: Thc c0ndI0n whcrcby n nvcsI0r s skng I0r hghcr cxpccIcd rcIurn I hc s
I0 Ikc 0n ddI0nl rsk. All rI0nl nvcsI0rs rc ssumcd I0 bc rsk vcrsc.
Thc slc 0I n sscI undcr n cxsIng lcsc I0r csh wIh Ihc grccmcnI
I0 smulInc0usly lcsc I bck Ir0m Ihc buycr.
A lnc IhI dcpcIs Ihc rclI0nshp bcIwccn Ihc cxpccIcd rIcs
0I rcIurn 0I sccurIy (0r P0rII0l0) nd Ihc sysIcmIc rsk 0I Ihc sccurIy (0r p0rII0l0) s mcsurcd
by bcI.
An 0IIcr by c0mpny I0 buy bck Is 0wn shrcs
500
Thc slc 0I dvs0n 0I c0mpny 0r Ihc c0mpny s wh0lc.
0cIcnsvc IcIc uscd by c0mpny I0 dsc0urgc w0uld bc Ikc0vcr bddcrs.
Thc m|0r
nIcrnI0nl Inncl Iclcc0mmuncI0ns ncIw0rk IhI IrnsmIs nIcrnI0nl pymcnI
nsIrucI0ns s wcll s 0Ihcr Inncl mcssgcs.
C0nvcrs0n 0I subsdry I0 c0mpny n whch Ihc shrcs 0I Ihc c0mpny rc
ssucd I0 Ihc prcnI c0mpny.
Trdc crcdI nd ccruls rsng nIurlly nd sp0nInc0usly Ir0m
IrnscI0ns n Ihc n0rml c0ursc 0I busncss.
All pcrs0ns hvng nIcrcsIs n Ihc pr0spccIs 0I Ihc c0mpny. Thcy ncludc
shrch0ldcrs, crcdI0rs, cusI0mcrs, cmpl0yccs, supplcrs, l0cl c0mmunIcs nd g0vcrnmcnI.
A sIIsIcl mcsurc 0I Ihc dcvI0ns Ir0m Ihc mcn 0I dsIrbuI0n.
Thc vluc 0I c0nvcrIblc dcbcnIurc I Ihc c0nvcrIblc IcIurc
wcrc 0I n0 vluc.
0cbI IhI hs n0 c0nvcrs0n IcIurc.
A IxdcducIblc cxpcnsc. !nIcrcsI, I0r cxmplc s shcldcd Ir0m bcng Ixcd n IhI
I rcduccs Ihc Ixblc nc0mc.
F0rcgn cxchngc rsk rsng Ir0m Ihc nccd I0 scIIlc prIculr
I0rcgn currcncy dcn0mnIcd IrnscI0n n IuIurc.
Rsk rsng Ir0m Ihc IrnslI0n 0I Ihc sscIs nd lblIcs 0I I0rcgn
subsdry nI0 Ihc prcnI c0mpny's currcncy.
An rbIrgc nv0lvng m0rc Ihn Iw0 currcnccs. 0bIn n mplcd
cr0ss rIc Ir0m Iw0 currcnccs I0 c0mprc wIh n0Ihcr, Ihcn buyng n Ihc mrkcI whcrc prcc
s l0w nd scllng n Ihc mrkcI whcrc prcc s hgh.
Fgurng lcgl grccmcnI I0 Ikc up Ih0sc shrcs n0I subscrbcd I0 by Ihc
publc n c0nsdcrI0n I0r sum 0I m0ncy kn0wn s undcrwrIng c0mmss0n.
A Ircndly purchscr wh0, hvng bccn nvIcd by Ihc IrgcI c0mpny, purchscs
shrcs Ir0m Ihc h0sIlc bddcr 0r lunchcd Ircndly c0unIcrbd n 0rdcr I0 IrusIrIc Ihc 0rgnl
h0sIlc bddcr.
Thc cxpccIcd rIc 0I rcIurn 0n dcbI sccurIy I purchscd I Ihc
currcnI mrkcI prcc nd hcld I0 mIurIy. Als0 kn0wn s rcdcmpI0n ycld.
A dcbI nsIrumcnI IhI pys n0 nIcrcsI buI sclls I prcc
much bcl0w Is pcr vluc nd IhcrcI0rc pr0vdcs rcIurn mnly n I0rm 0I cpIl pprccI0n.
50
Allc, H. ! & An0, A. R. (98b): 1cr0mclh0
& Ass0cIcs LId., Lg0s.
sc0c, P.N: , uIIcrw0rIh & C0mp.
rghm, Eugcnc F: , Thc 0rydcn Prcss,
0rlnd0
CcnIrl SccurIcs Clcrng SysIcm (CSCS): (Rcvscd Ed).
0d, !sc 0: ,
SpccIrum 00ks LmIcd, !bdn.
EIcmn, 0vd K, SI0nchll, ArIhur L nd M0IIcI, Mchcl H:
(9
Ih
cd), Adds0n wcslcy Publshng C0mpny !nc, Ncw Y0rk.
!CAN SIudy Pck: \! Publshng LmIcd 200b.
10ncs, crnrd M (99b): , Mc0rw
Hll Publshng C0mpny, crkshrc.
Mclncy E.1 (997): (4
Ih
E0), PImn
Publshcrs, L0nd0n.
Mclvn Mchcl (2000): (b
Ih
cd), Adds0n wcslcy
EducI0nl Publshcr !nc, Ncw Y0rk.
Ngcrn SI0ck Exchngc (NSE): (ucsI0n &
Answcrs), NSE PublcI0ns.
0'rcn, 1mcs A (2002): , Thc Mc0rw Hlls
C0mpncs !nc. 22, Ncw Y0rk.
Pndcy, !.M (98b): \ks Publshng H0usc PvI LId, Ncw
0clh.
R0gcrs, b|dc:
(Ppcr PrcscnIcd I Ihc 4
Ih
PrIncrs F0rum 0I Ihc Publc PrcIcc SccI0n 0I !CAN),
Ngcrn Acc0unIl 10urnl 1nMr,2002.
Smucls, 1.M, wlkcs F.M & ryshw, R.E (99):
(5
Ih
cd), Chpmn & Hll, L0nd0n.
Smucls, 1.M, wlkcs F.M & ryshw, R.E (999):
, !nIcrnI0nl Th0mps0n usncss Prcss, L0nd0n.
502
Sudrsnm, P. S. (995): Funmn
Tmcs PrcnIcc Hll, Eur0pc.
\n H0rnc 1.C. & wch0wcz (1r) 1. M (2003):
PrcnIccHll 0I !nd PvI LId.
wcsI0n, 1. F & C0pclnd, T.E (98b): 0rydcn Prcss, 0rlnd0.
wnIcld. R. 0. & Curry S. 1. (98): 10hn Murry
(Publshcrs) LId., L0nd0n.
503
Ths ppcndx c0nIns n0Ics 0n:
() Usng Ihc qucsI0ns nd nswcrs pr0vdcd n Ihc mnul.
(b) EIIccIvc sIudy.
(c) ExmnI0n Icchnquc.
!nIr0ducI0n
. Tw0 Iypcs 0I qucsI0n rc pr0vdcd n Ihs mnul:
. ucsI0ns scI I Ihc cnd 0I chpIcr wIh nswcrs pr0vdcd n Appcndx !
C0mprchcnsvc sIndrd cxmnI0n qucsI0ns n Appcndx !!
. S0luI0n I0 c0mprchcnsvc qucsI0ns n Appcndx !!!
v. S0luI0n I0 csc sIudy qucsI0ns n Appcndx !\
2. Thcsc qucsI0ns rc cIhcr:
. qucsI0ns nIcndcd I0 IcsI Ihc undcrsIndng 0I Ihc p0nIs rsng 0uI 0I
Ihc prIculr chpIcr, 0r
. cxmnI0n qucsI0ns nscrIcd I sIgc whcrc I s c0nsdcrcd Ihc sIudcnI
wll bc blc I0 gvc rcs0nblc nswcr.
3. M0sI nswcrs rc gvcn n 0uIlnc buI s0mc cxmnI0n nswcrs g0 lIIlc IurIhcr
n 0rdcr I0 pr0vdc grcIcr gudncc nd pr0vdc sIudcnIs wIh Ihc bss I0r
sIudy.
4. whcrc nswcrs rc c0mprchcnsvc y0u c0uldn'I bc cxpccIcd I0 wrIc Ihcm n Ihc
Imc ll0wcd. 00 n0I w0rry I y0u Iccl y0u c0uldn'I wrIc such nswcrs, y0u rc
n0I cxpccIcd I0. uI y0u musI grsp Ihc mn p0nIs 0r prncplcs nv0lvcd whch
wll I0rm Ihc bss I0r g00d mrks n n cxmnI0n.
5. 00 n0I w0rry I y0ur nswcr dIIcrs, Ihcrc s 0IIcn m0rc Ihn 0nc ppr0ch. Y0u
musI sIsIy y0ursclI h0wcvcr, IhI I s 0nly Ihc ppr0ch IhI dIIcrs, nd IhI
y0u hvcn'I msscd Ihc IundmcnIl prncplcs.
b. Hvc sh0I I cch qucsI0n y0ursclI bcI0rc c0nsulIng Ihc nswcr, y0u wll.
chcvc n0Ihng I y0u d0n'I d0 Ihs. .wrIc y0ur nswcr 0uI n Iull 0r |0I d0wn Ihc
mn pnIs. 00 n0I hurry I0 Ihc nswcr.
7. L00k I Ihc nswcr (n Ihc csc 0I cxmnI0n nswcrs). SIudy Ihc prIculr
504
rc Ih0r0ughly mkng surc 0I y0ur undcrsIndng. RcpcI Ihc pr0ccss 0uIlncd
n Ihc b0vc IIcr suIblc nIcrvl. Y0u musI d0 IhsI0 gcI ny bcncII I ll.
Mkc surc Ihc mn p0nIs sIck. !
8. 1usI br0wsng Ihr0ugh Ihc nswcrs wll rclly gcI y0u n0whcrc. Y0u musI IcsI
y0ursclI by wrIng d0wn y0ur vcrs0n 0I Ihc nswcr.
. Thcsc n0Ics rc nIcndcd I0r Ih0sc wh0 rc ncw I0 sIudyng I0r cxmnI0n
sub|ccIs, lIh0ugh Ih0sc wh0 rc n0I my ls0 bcncII. Thcy hvc bccn wrIIcn n
rclI0n I0 sIudy nv0lvng Ihc rcdng 0I IcxI b00ks , nd Ihc pply I0 ll sub|ccIs.
!I s 0IIcn cxIrcmcly dIIculI I0 pck 0uI Ihc mp0rInI prncplcs such b00ks.
2. SIudy mcns m0rc Ihn |usI rcdng pccc 0I lIcrIurc. !I mcns cl0sc
c0nccnIrIcd rcdng wIh n0Icb00k I y0ur sdc. Unlcss y0u'rc 0nc 0I Icw
pc0plc d0n'I kd y0ursclI y0u cn bs0rb mIcrl by |usI 0nc gcncrl rcd Ihr0ugh
I, y0u cnn0I!
3. Rcd smll rc, mkng n0Ics s y0u g0 l0ng. Thcn sk y0ursclI whI hvc
! |usI lcrnI! wrIc d0wn whI y0u Ihnk I ws ll b0uI. Thcn l00k gn nd y0u
my bc surprscd I0 Ind 'y0u'vc msscd kcy p0nI 0r p0nIs Ihcy musI bc d0wn
n y0ur n0Icb00k nd cvcnIully n y0ur hcd.
4. A wcll c0mplcd N0TE00K s musI. Usc bl0ck cpIls 0r dIIcrcnI c0l0ur nks
I0 hcdlnc Ihc mn rcs nd subdvs0ns 0I Ih0sc rcs. N0Ics mdc durng
lccIurcs 0r prvIc sIudy sh0uld n0I g0 sIrghI nI0 y0ur N0TE00K. Tkc Ihcm
0n "r0ugh" ppcr nd wrIc Ihcm n y0ur N0TE00K s s00n s p0ssblc IIcr
Ihc lccIurc 0r sIudy pcr0d, Ihnkng b0uI whI y0u rc wrIng. PrcIsc Ihc
llusIrI0n n Ihc mcIh0d y0ursclI s mn Imc s s p0ssblc.
5. Mncm0ncs rc vcry uscIul I Ihc scqucncc 0I p0nIs n Ihc IcxI b00k sn'I
sgnIcnI chngc I, I mkcs I0r bcIIcr mncm0nc.
b. Ass0cI0n 0I Ihc p0nIs wIh Imlr 0b|ccIs whch wll scrvc I0 rccll Ihcm s
ls0 uscIul.
7. S0mc pc0plc mcm0rsc Ihngs by syng Ihcm 0vcr nd 0vcr 0uI l0ud, 0Ihcrs
hvc I0 wrIc Ihcm d0wn Imc IIcr Imc ncludng I0rmulc .
8. Mny sIudcnIs hvc smll blnk crds nd usng 0nc sdc 0I cch crd I0r cch
sIudy rc, puI d0wn Ihc mn p0nIs. Thcy crry Ihc crds cvcrywhcrc wIh
Ihcm nd usc cvcry 0pp0rIunIy I0 sIudy Ihcm. As Ihcy rc smll Ihcy rc csly
crrcd. !I s surprsng h0w much 0I y0ur dy cn bc uIlscd n Ihs wy.
505
9. Mp 0uI pr0grmmc I0r y0ursclI, scI IrgcIs nd chcvc Ihcm. 0nc Ihng s
ccrIn, sIudyng s n0I csy buI I s n0I I00 dIIculI I y0u g0 b0uI I n n
0rdcrly purp0scIul wy. Mny sIudcnIs Il Ihcr cxmnI0ns Ihr0ugh bd
prcprI0n. Tcklc y0ur sIudcs s y0u w0uld pr0|ccI I w0rk, sysIcmIclly.
All0cIc numbcr 0I h0urs cch wcck I0r cch sub|ccI. Try Ixng spccIc Imcs
I0r cch sub|ccI, Ihcn kccp I0 Ihcm by rcIusng I0 lcI nyIhng kccp y0u Ir0m
y0ur plnncd Isk.
Rcvsc pcr0dclly Thc ncrcr Ihc cxmnI0n gcIs, Ihc m0rc y0u sh0uld
c0nccnIrIc 0n Ihc m|0r hcdlncs n y0ur n0Icb00k nd lcss wIh Ihc supp0rIng
dcIls.
. H0wcvcr wcll prcprcd y0u my bc, y0u rc sIll lkcly I0 l00k I Ihc ppcr 0n Ihc
dy nd sy I0 y0ursclI, IIcr quck l00k I Ihc qucsI0ns, "Thcrc's n0I much
Ihcrc l cn d0".
2. Thc Im0sphcrc 0I Ihc cxmnI0n r00m hs s0mcIhng I0 d0 wIh Ihs. Try I0 bl0I
cvcryIhng Ir0m y0ur mnd 0Ihcr Ihn Ihc |0b n hnd. C0nccnIrIc hrd. !I y0u
Iccl bI pncky ( m0sI pc0plc d0 dcspIc Ihc pprcnI l00ks 0I scrcnIy r0und
y0u) grp Ihc Iblc, Ikc dccp brcIh, nd gcI 0n wIh I. Rcmcmbcr Ihngs rc
ncvcr s bd s Ihcy sccm!
3. All0cIc cch qucsI0n Imc ppr0prIc I0 Ihc numbcr 0I mrks. AI Ihc cnd 0I Ihc
ll0IIcd Imc I0r qucsI0n g0 0n I0 Ihc ncxI rcmcmbcr, Ihc IrsI 5 I0 0 mrks 0n
Ihc ncw qucsI0n rc m0rc rcdly pckcd up Ihn Ihc lsI 0r 2 prcv0us qucsI0n.
4. Thc IcmpII0n wll bc I0 sy "! '!! wrIc |usI 0nc m0rc scnIcncc", buI bcI0rc y0u
kn0w whcrc y0u rc y0u 'll hvc wrIIcn scvcrl m0rc nd pr0bbly |usI mngcd
I0 scrpc n0Ihcr mrk, whcrcs Ihc smc Imc spcnI 0n Ihc ncxI qucsI0n c0uld
hvc crncd 5 0r b mrks. T!ME ALL0CAT!0N !S !MP0RTANT.
5. !I y0u rc runnng 0uI 0I Imc wrIc d0wn Ihc mn hcdngs IrsI, lcvng Icw
lncs bcIwccn cch I lcsI Ihc cxmncr wll scc IhI y0u hd Ihc 0vcrll pcIurc.
Thcn g0 bck puIIng n s much supp0rIng dcIl s y0u cn.
b. !I s dvsblc I0 spcnd 5 mnuIcs n rcdng ll Ihc qucsI0ns nd Ihcn 50
mnuIcs n nswcrng Ihc qucsI0ns (.c. 0nc mrk s .5 mnuIcs (40 mrks 0I
mulIplc ch0cc nd sh0rInswcrs qucsI0ns sh0uld sIudcnI spcnd m0rc Ihn b0
mnuIcs). 0n n0 cc0unI sh0uld sIudcnI spcnd m0rc Ihn b0 mnuIcs 0n 40
mrks qucsI0n. Thc rcmnng 5 mnuIcs sh0uld bc spcnI n rcdng 0vcr nd
mkng m0rc p0nIs whch y0u mghI hvc I0rg0IIcn n Ihc c0ursc 0I s0lvng Ihc
pr0blcm.
50b
FrsI Rcdng 5 mnuIcs
MulIplc Ch0cc 5 mnuIcs
Sh0rIAnswcr qucsI0n 45 mnuIcs
C0mprchcnsvc qucsI0n 90 mnuIcs
Rcdng 0vcr 5 mnuIcs
80 mnuIcs
3 h0urs
!I sIudcnIs cn Irn Ihcmsclvcs n Ihs drccI0n, I wll bc 0I mmcnsc vluc, n0I
0nly 0n MngcmcnI Acc0unIng buI ls0 0n 0Ihcr sub|ccI.
7. Rcd Ihc nsIrucI0ns I Ihc I0p 0I Ihc ppcr.
8. Rcd Ihc qucsI0n ppcr 0ncc Ihr0ugh. Mkc y0ur ch0cc 0I qucsI0ns quckly.
Pck Ihc cscsI (I 0nc ppcrs s0) nd gcI 0n wIh I.
!
9. Rcd Ihc qucsI0n gn crcIully. Thc qucsI0n wll nv0lvc kcy prncplc 0r
scI 0I prncplcs. whI rc Ihcy! !I s s0 csy I0 mkc Ihc wr0ng dccs0n I Ihs
sIgc, s0 rcd Ihc qucsI0n, undcrlnng whI ppcr I0 bc Ihc kcy w0rds. Ths
sh0uld hclp y0u. !rrclcvncy hs bccn hcvly crIcscd by cxmncrs.
0. 00 n0I rush nI0 cI0n wIh y0ur pcn ycI. 10I d0wn 0n pccc 0I scrp ppcr (n0I
0n qucsI0n ppcr) Ihc mn hcdngs y0u wll usc n y0ur nswcr. All Ihs wll
Ikc Imc b0uI 5 mnuIcs 0r m0rc, buI, Ihc crcIul Ih0ughI nd 0uIlnc nswcr
rcprcscnIs mrks lrcdy crncd.
. !I Ihc qucsI0n s scI 0uI n prIculr scqucncc, c:
. .......
b. .........
c. ........ cIc.
Ihcn nswcr I n IhI scqucncc 0r y0u'll hvc h0sIlc cxmncr I0 c0pc wIh.
2. Usc Ihc prIculr Icrmn0l0gy uscd n Ihc qucsI0n, Ihc cxmncr cn Ihcn lnk
Ihc p0nIs n y0ur nswcr I0 Ihc rclcvnI prIs 0I Ihc qucsI0n.
3. AssumpI0ns rc s0mcImcs rcqurcd (I0r cxmplc bccusc 0I Ihc lck 0I sIn
drdsI0n 0I Icrmn0l0gy n Ihs sub|ccI). Hvng sIIcd y0ur ssumpI0ns,
mkc surc IhI whI y0u wrIc s c0nssIcnI wIh Ihcm. 00 cnsurc, h0wcvcr, IhI
y0ur ssumpI0ns rc vld nd rc n0I |usI dcvcc I0r chngng Ihc mcnng
0I Ihc qucsI0n I0 suI y0ur kn0wlcdgc!
4. TbulIc whcrc ppr0prIc, usng bl0ck cpIls I0r y0ur mn hcdngs nd
undcrlnc subhcdngs. Undcrlnc w0rds 0r phrscs whch rcqurc cmphss.
Usc rulcr.
507
5. Lcvc lnc bcIwccn y0ur prgrphs nd subprgrphs. Ths mkcs I0r
g00d ly0uI. H0wcvcr, d0 n0I wrIc 0n cvcry 0Ihcr lnc wIhn prgrphs, 0r 0n
0nc sdc 0I Ihc ppcr 0nly cxmncrs rc wsIc c0nsc0us!
b. Thc usc 0I dIIcrcnI c0l0ur pcns, whcrc ppr0prIc, s uscIul buI d0n'I 0vcrd0 I.
!n IcI 0nc blck nd 0nc rcd IclIIp pcn w0uld bc suIIccnI (usc Ihc IclIIp
pcns whch hvc Inc p0nI }.
7. A dcscrpIvc hcdng 0r IIlc musI bc gvcn I0 cch dgrm (usng Ihc 0nc n
Ihc qucsI0n I ndcIcd).
8. 00 n0I squcczc dgrm nI0 c0rncr sprcd I 0uI.
9. 00 n0I cluIIcr y0ur dgrm up wIh I00 much dcIl Ihs dcIcIs Ihc 0b|ccI,
whch sh0uld bc clrIy.
20. 0vc kcy I0 Ihc symb0ls nd Ihc dIIcrcnI lncs. y0u'vc uscd, nd gn usc
rulcr.
2. Hvc quck l00k I cch nswcr, chcckng I0r grmmIcl crr0rs nd bdly
I0rmcd lcIIcrs.
22. Ensurc cch nswcr shccI hs y0ur numbcr 0n I nd d0n'I lcvc ny nswcr
shccI lyng 0n Ihc Iblc.
23. 000d Icchnquc plys lrgc prI n cxmnI0n succcss, Ihs s IcI. RcIusc I0
bc pnckcd, kccp y0ur hcd, nd wIh rcs0nblc prcprI0n, y0u sh0uld mkc
I.
24. Rcmcmbcr y0u d0n'I hvc I0 sc0rc 00 I0 pss.
25. A Inl p0nI, 0ncc y0u'rc n Ihc cxmnI0n r00m sIy Ihcrc nd mkc usc 0I
cvcry mnuIc I y0ur dsp0sl.
2b. PrcIsc y0ur Icchnquc whcn nswcrng Ihc qucsI0ns scI n Ihs mnul.
27. Rcmcmbcr IhI y0u sh0uld n0I Ikc y0ur Iclcph0nc I0 Ihc cxmnI0n hll 0r
ny 0b|ccI IhI s n0I pcrmIIcd.
509
Abnd0nmcnI 0ccs0n 07, 0, 493,
Acc0unIng RIc 0I RcIurn 89, 9, 94, 95, 9b,
04, 05, 38b, 399
Accruls 459, 500
AcqusI0n 8, 53, 87, 239, 259, 2b3,
303, 334, 355, 35b, 3b5, 3bb, 370, 37,
374, 375, 379, 383, 390, 4b2, 473,
48b, 487, 502
Ad|usIcd PrcscnI \luc 429, 44, 430, 47b,
493
AIrcn 0cvcl0pmcnI nk (A0)
39, 423, 44
Agcncy C0sIs 20, 23, 493
Am0rIsI0n Tblc b9, 8, 493
AnnuIy b9, 74, 7b, 77, 78, 79, 80, 82,
09, , 7, 449, 45, 493
ArbIrgc
83, 223, 224, 225, 228, 293, 298, 40b, 407,
424, 4b3, 493, 495, 500
ArbIrgc Prcng Thc0ry 493
AsymmcIrc !nI0rmI0n 493
lncc 0I PymcnI 420, 42, 422, 44
l00n PymcnI 493
nk 0vcrdrII 5, 52, bb, 30b, 309
csI EII0rIs !ssuc 493
cI 49, 209, 24, 275, 292, 493, 494, 499
cI IcI0r 290, 292, 4b7
0nd 4, 38, 40, 4, 42, 43, 4b, 47, 7,
73, 82, 8b, 235, 2b0, 295, 48, 447,
453, 493
00k \luc 95, b9, 493
00k vluc 94, 3, 3, b9, 70, 204, 25,
54, 3b3, 480
usncss Rsk 9, 2, 200, 43, 440, 493
Cll 0pI0ns 494
CpIl AsscI Prcng M0dcl 30, 33, 27b, 292
CpIl udgcIng 59, b0,b, 88, 9, 92, 2,
37, 44, 427, 440, 44, 472, 494
CpIl C0nIr0ls 494
CpIl FlghI 494
CpIl 0n (L0ss) 494
CpIl MrkcI 4, 0, 4, 22, 3, 35, 37, 40,
4, 235, 259, 2b9, 273, 274, 373, 494, 50
CpIl RI0nng 07, 4, 22, 494
CpIl SIrucIurc 95, 200, 20, 22, 23,
24, 25, 27, 28, 44, 437, 4bb, 494
27, 28, 29, 220, 223, 228, 229, 254, 395,
424, 427, 437, 440, 442, 455, 45b
CpIlsI0n rIc 28, 494, 49b
Csh C0ws 52
Csh Cyclc 30,309, 494
Csh dsc0unI 33, 52, 53, bb, 330,
33, 39, 329, 494
Csh 0vdcnd b4, 75, 7b, 23, 232,
237, 234, 235, 23b, 237, 239, 254,
255, 25b, 37, 494
Csh EquvlcnI 494
CcnIrl nk 0I Ngcr 38, 44, 4b, 47,
54, 389, 40b
CcrInIy EquvlcnI 37, 38, 39, 48,
49, 50, 28, 387, 399, 494, 38,
28,
ChrcIcrsIcs Lnc 494
ChrIsIs 295, 494
Clcrng H0usc !nIcrbnk PymcnI SysIcm
(CH!PS) b4, 495
C0cIIccnI 0I \rI0n 47, 495
C0mmcrcl Ppcr 38, 39, 40, 4b, 48, 5,
54, bb, 307, 322, 447, 495
C0mmcrcl Ppcrs 38, 39, 40, 54, bb,
447
C0mmImcnI Fcc 54, 495
C0mp0und !nIcrcsI b9, 70, 7b, 77, 83, 84,
495
C0nvcrs0n Prcc b0, b, b2, b3,
83, 453, 495
C0nvcrs0n RI0 b0, b, b2, 82, 453,
495
C0nvcrs0n \luc b, b7, 8, 82, 453,
495
C0nvcrIblc SccurIy b7, 495
C0rp0rIc 00vcrnncc 25, 2b, 27, 28,
32, 33, 470, 47
C0rrclI0n 283, 284, 285, 287, 288,
292, 4bb, 495
C0rrclI0n C0cIIccnI 292, 495
C0sI 0I CpIl 9, 9b, 97, 98, 00, 02,
08, 5, 8, 2, 27, 9, 92, 93,
95, 97, 99, 200, 20, 203, 20, 2, 23,
25, 2b, 27, 28, 29, 222, 224,
225, 227, 229, 234, 359, 403, 424,
427, 428, 429, 43, 432, 433, 437,
440, 44, 442, 45, 45b, 4b5
C0up0n RIc 4, 42, 7, 72, 75, 8,
85, 229, 4b7, 495
C0vrncc 495
C0vcnnI 22, 54, 5b, b5, 235, 495
C0vcrcd !nIcrcsI ArbIrgc 495
Cr0ss rIc 407, 408, 424, 495, 500
Cr0sslsIng 495
50
Currcncy FuIurc 49
Currcncy 0pI0n 48, 49, 477, 495
Currcncy Swp 48, 420, 477, 495
0cbcnIurc SI0ck 74, 85, 203, 20, 25,
2b, 3b2, 4b5
0cbIcquIy Swps 495
0ccs0n Trcc 37, 45
0ccs0n Ircc 89, 45, 49
0ccp MrkcI 49b
0crvIvc SccurIy 49b
0luI0n b3, b5, bb, 23b, 3b7, 394, 399,
49b
0rccI u0Ic 404, 49b
0sc0unI rIc (cpIlsI0n rIc) 49b
0sc0unIcd Csh Fl0w (0CF) 5, 9, 9b,
3b0, 375, 49b
0vcrsIcI0n 8, 22, 53, 275, 288,
288, 359, 357, 375, 387, 40, 428, 47
0vcsImcnI 52, 379, 383, 49b
0vdcnd 0ccs0n 23, 240, 398
0vdcnd Ycld 395, 39b, 397, 49b
0vdcndpy0uI rI0 234, 240, 49b
0rII 3, 39, 5, 52, bb, 2b, 24b, 255,
30b, 309, 340, 388, 493, 49b
0uIch AucI0n SysIcm 49b
Ernngs Pcr Shrc 9, 2, 5b, b3,
3bb, 39b, 400, 474, 480, 49b, 49b, 499
Ec0n0mc Exp0surc 43, 44, 424, 4b3, 49b
Ec0n0mc 0rdcr unIIy (E0) 34b, 4b9,
49b
Ec0n0mcs 0I Sclc 22, 428, 37b, 49b
EIIccIvc nnul nIcrcsI rIc 49b
EIIccnI Inncl mrkcI 28b, 300, 49b, 458
EIIccnI MrkcI Hyp0Ihcss 2b9, 27b, 295,
298
EIIccnI P0rII0l0 27b, 28b, 399, 497
ElccIr0nc C0mmcrcc (cC0mmcrcc) b2, 497
ElccIr0nc 0I !nIcrchngc (E0!) b3, 497,
448
EquIy Crvc0uI 377, 380, 383, 497
Eur0 25, 48, 42, 44, 442, 497, 502
Eur0bnk 497
Eur0currcncy 497
Eur0d0llr 48, 497
ExrghIs dIc 497
Exchngc RIc b4, 404, 40b, 407, 408,
409, 40, 4, 43, 45, 4b,
48, 49, 420, 422, 424, 425, 428, 432, 434,
440, 479, 495, 49b
Excrcsc Prcc b3, b4, 83, 84, 494, 497,
499
ExpccIcd RcIurn 87, 5b, 209, 270,
275, 27b, 278, 280, 283, 287, 293,
458, 4b7, 497
ExpccIcd \luc 42, 43, 44, 45, 8b, 279,
28, 37b, 452, 485, 497
FcI0rng 49, 227, 307, 325, 333, 334,
335, 33b, 339, 340, 34, 4b0, 497, 50
Fnncl ElccIr0nc 0I !nIcrchngc (FE0!)
b4, 497
Fnncng 0ccs0n 7, 33, 9, 94, 27,
23, 398, 403, 445
FnIc H0rz0n , 2, 37, 38, 48, 45
Fshcr EIIccI 497, 408
Ixcd chrgc 55, 88
Fl0II0n C0sIs 55, b5, 88, 232, 497
Fl0Ing rIc 497
F0rwrd C0nIrcI 48, 49, 425, 495, 498
FuIurcs C0nIrcI 49, 477, 498
00ng PrvIc 379, 38, 383, 384, 498
00ldcn PrchuIc 372
Hcdgng (F0rcgn Exchngc) 498
Hcdgng (LqudIy) 498
Hrc Purchsc 8b
Hurdlc RIc 45, 498
!R0 420, 42, 422
!0A 238, 420, 42, 422
!FC 39, 420, 42, 44
!MF 42, 422, 423, 425, 44, 498
!MF C0ndI0nlIy 498
!ndIIcrcncc Curvc 285, 28b, 458, 498
!nIl Publc 0IIcrng (!P0) 380, 498
!nIcrcsI RIc PrIy 408, 4, 42, 424
!nIcrcsI rIc rsk 498
nIcrcsI rIc rsk 42, 44
!nIcrnl RIc 0I RcIurn 59, 84, 89, 9, 98,
04, 23, 44, 45, 455, 498
!nIrnsc vluc b9, 70, 7b, 84,
85, 25, 2b9, 294, 295, 398, 498
5
!nvcsImcnI 0ccs0n 3, b, 84, 90, 07, 2,
47, 9, 92, 94, 428, 27, 27b, 277,
445, 449
1usInTmc (1!T) 343, 350
Lcdng 98, 00, 279, 297, 327, 328, 47,
437, 442, 477
Lcsc
58, b4, 55, 87, 89, 90, 9, 92, 93,
94, 95, 9b, 97, 247, 27, 39, 404,
4b2, 472, 489, 490, 49, 498, 499
Lcvcrgcd Lcsng 498
Lcsscc 87, 89, 90, 93, 95, 9b,
97, 454, 490, 499
Lcss0r 89, 90, 95, 454, 498
Lnc 0I CrcdI 235, 498, 490
MngcmcnI buyn 377, 39
MngcmcnI uy0uI 377, 380, 384, 39, 4b2
MrkcIblIy (0r LqudIy) 498
Mcrgcr 53, 355, 35b, 357, 358,
359, 3b0, 3b, 3b2, 3b3, 3b4, 3b5, 3b7,
3b8, 3b9, 370, 372, 373, 375, 37b, 377,
379, 380, 382, 383, 384, 428, 4b,
472, 473, 474, 475, 484, 485, 48b, 502
M0ncy MrkcI 37, 38, 40, 4b, 54, 307, 322,
447
M0ncy MrkcI 37, 38, 39, 4, 4b, 47, 48,
M0rIggc 85
N0!C 2b, 00, 07, 0, 40, 253, 294, 302,
330, 334, 395, 409, 42, 443, 44, 48,
473, 475, 48, 490, 49b, 507
NcgIvc Plcdgc 498
NcI Lcsc 499
NcI PrcscnI \luc , 8, 9b, 05, 2b, 27,
29,
Ngcrn SI0ck Exchngc (NSE)
44, 45, 47, 244, 259, 2b0, 2b8, 272,
273, 388, 400, 50
0IIcr I0r Slc 244, 257, 258, 457
0IIcr I0r SubscrpI0n 244, 245, 25b, 257,
258, 457
0pcrIng Cyclc 30, 302, 303, 309, 30,
499
0pp0rIunIy C0sI 20, 74, 9, 9b,
02, 05, 08, 7, 27, 49, 87,
9, 200, 25b, 39, 320, 32b, 338,
345, 353, 3b0, 370, 49, 43, 487
0uIs0urcng b0, 382, 384, 499
Pybck Pcr0d 89, 9, 92, 93, 02, 03,
04, 05, 23, 25, 2b, 27, 33, 38, 38b,
399, 487, 488
P0s0n pll 37, 37b, 499
P0rII0l0 Thc0ry 282, 289, 298, 299, 300,
458
PrcIcrcncc Shrc CpIl 55, 5b,
204, 302, 307, 400
Prcccrnngs rI0 40, 499
Prmc rIc 499
Pr0bblIy 0sIrbuI0n 499
Pr0bblIy 0sIrbuI0n 45, 278, 452
Pr0II MxmsI0n 8, 9, 5, 472
Pr0IIblIy !ndcx 9, 0, 05, 5,
b, 22, 23, 8, 44
Pr0|ccI Inncc 55, 9b
Pr0mss0ry n0Ic 39, 54, 495, 499
Purchsng P0wcr PrIy 408, 409, 40,
424, 425
PuI 0pI0n 49, 420, 499
Rnd0m wlk Thc0ry 295, 298
Rcnv0cng CcnIrc 499
RcsIrucIurng 355, 379, 383
Rcvcrsc Shrc SplI 238, 499
Rcv0lvng CrcdI AgrccmcnI 499
RghI !ssuc 243, 252, 482
Slc nd Lcscbck 499
Scrp ssuc 23, 238, 240, 24
Scll0II 37b, 379, 383, 500
ScllIcndcr 0IIcr 499
ScnsIvIy Anlyss b0, b, b7, 37, 39,
48, 49, 387, 399, 430, 432
52
Shrk rcpcllnI 500
Sh0rI 4b
SmulI0n 37, 39, 50
Snkng Fund b9, 78, 449
S0ccIy I0r w0rldwdc !nIcrbnk Fnncl
Tclcc0mm b4, 500
Spn0II 52, 37b, 380, 383, 384, 500
Sp0nInc0us Fnncng 307, 30, 337, 500
SIkch0ldcrs 0, , 4, 2b, 32, 33, 57, 24b,
38b, 399, 470, 47, 500
SIndrd 0cvI0n 89, 37, 43, 44, 45,
278, 292, 4bb, 495, 500
SIrghI 0cbcnIurc 8, 82, 83, 500
sIrghI dcbcnIurc
Syncrgy 355, 35b, 4b, 4b4, 484, 485
Tx Shcld 9, 94, 97, 204, 22b, 229, 429,
500
Trdc CrcdI 5, 52, 337, 339, 340, 4b,
459, 500
TrnscI0n Exp0surc 43, 500
UndcrwrIng 45, 244, 245, 248,
457, 500
UnI TrusI 44, 243
UnsysIcmIc Rsk 299
\cnIurc CpIl 390, 39, 392, 393, 400,
4b2
whIc KnghI 37, 37b, 500
w0rld nk 420, 42, 422