An Essay on Different Sources of Finance:

Finance is significant for business because it cannot carry out its operations even for a s
the sources from where funds can be collected. The selection of source depends upon t
period, debt-equity mix, etc. The selection of source also depends upon the purposes fo
Funds required for acquiring machine, land & building, etc., should be procured from su
years. Funds required for more than 1 year but less than 5 years should be financed fro
day expenses should be acquired from short-term sources.
i. Long-term Sources:
A firm needs funds to purchase fixed assets such as land, plant & machinery, furniture,
which have a longer maturity repayment period. The capital required for purchasing the
capital must be financed using long-term sources of finance.
ii. Medium-term Sources:
Funds required for say, a heavy advertisement campaign, the benefit of which lasts for m
medium-term sources of finance. In other words expenditure that results in deferred re
iii. Short-term Sources:
Funds required for meeting day-to-day expenses, i.e. revenue expenditure or working c
maturity period is one year or less.
iv. Owned Capital:
Owned capital represents equity capital, retained earnings and preference capital. Equi
income of the firm but the equity shareholders have the right to control the affairs of th
v. Borrowed Capital:
Borrowed capital represents debentures, term loans, public deposits, borrow­ings from
to get a fixed rate of interest irrespective of profit and are to be repaid on a fixed date.
vi. Internal Sources:
If the funds are created internally, i.e. without using debt, such sources can be termed
back of profits, provision for depreciation, etc.
vii. External Sources:
If funds are re-used through the sources which create some obligation to the firm, such
financing, hire purchase, etc..
 operations even for a single day without Finance. It is therefore important to search
source depends upon the amount of funds required, nature of business, repayment
ds upon the purposes for which funds are needed.
uld be procured from such sources, the tenure of which must be between 5 and 10
should be financed from medium-term sources. Funds required for meeting day-to-

& machinery, furniture, etc. These assets should be purchased from those funds
uired for purchasing these assets is known as fixed capital. So funds required for fixed

enefit of which lasts for more than one accounting period, should be financed through
at results in deferred revenue should be financed through medium-term sources.
xpenditure or working capital should be financed from short-term sources whose

preference capital. Equity share has a perpetual life and are entitled to the residual
o control the affairs of the business because they enjoy the voting rights.
osits, borrow­ings from bank, etc. These are contractual in nature. They are entitled
repaid on a fixed date.
sources can be termed as internal sources. Examples of such could be: Ploughing

gation to the firm, such sources can be termed as external sources, e.g. lease
Note on Different Types of Financial Market:
Financial markets refer broadly to any marketplace where the trading of securi
derivatives market, among others. Financial markets are vital to the smooth op
Financial markets play a vital role in facilitating the smooth operation of Capita
businesses and entrepreneurs. The markets make it easy for buyers and sellers
products that provide a return for those who have excess funds (Investors/lend
money (borrowers). 
Financial Market are of the following types:
1. Capital Market
2. Bond Market
3. Money Market
4. Commodity Market
5. Derivative Market
6. Over the Counter Market
A breif description about few of the Markets are given below:
1.Over-the-Counter Markets
An over-the-counter (OTC) market is a decentralized market—meaning it does
which market participants trade securities directly between two parties withou
stocks that are not listed on the NYSE, or the American Stock Exchange. In gene
trade on primary markets, as OTC markets require less regulation and cost less
2.Bond Markets
A bond is a security in which an investor loans money for a defined period at a
an agreement between the lender and borrower that contains the details of th
by municipalities, states, and sovereign governments to finance projects and o
issued by the United States Treasury, for example. The bond market also is call
3.Money Markets
Typically the money markets trade in products with highly liquid short-term ma
of safety and a relatively low return in interest. At the wholesale level, the mon
traders. At the retail level, they include money market mutual funds bought by
customers. Individuals may also invest in the money markets by buying short-t
among other examples.
4.Derivatives Market
A derivative is a contract between two or more parties whose value is based o
assets (like an index). Derivatives are secondary securities whose value is solely
In and of itself a derivative is worthless. Rather than trading stocks directly, a d
advanced financial products, that derive their value from underlying instrumen
and stocks. 
5.Forex Market
The Forex Market(Foreign Exchange Market) is the market in which participant
forex market is the most liquid market in the world, as cash is the most liquid o
transactions, which is more than the futures and equity markets combined. As
consists of a global network of computers and brokers from around the world.
banks, investment management firms, hedge funds, and retail forex brokers an
The Forex Market(Foreign Exchange Market) is the market in which participant
forex market is the most liquid market in the world, as cash is the most liquid o
transactions, which is more than the futures and equity markets combined. As
consists of a global network of computers and brokers from around the world.
banks, investment management firms, hedge funds, and retail forex brokers an
et:
ere the trading of securities occurs, including the stock market, bond market, forex market, and
e vital to the smooth operation of capitalist economies.
ooth operation of Capitalist Economies by allocating resources and creating liquidity for
sy for buyers and sellers to trade their financial holdings. Financial markets create securities
ess funds (Investors/lenders) and make these funds available to those who need additional

below:
arket—meaning it does not have physical locations, and trading is conducted electronically—in
ween two parties without a broker. An OTC market handles the exchange of publicly traded
Stock Exchange. In general, companies that trade on OTC markets are smaller than those that
regulation and cost less to use.

or a defined period at a pre-established interest rate. You may think of a bond as

ontains the details of the loan and its payments. Bonds are issued by corporations as well as
o finance projects and operations. The bond market sells securities such as notes and bills
bond market also is called the debt, credit, or fixed-income market.

hly liquid short-term maturities (of less than one year) and are characterized by a high degree
wholesale level, the money markets involve large-volume trades between institutions and
mutual funds bought by individual investors and money market accounts opened by bank
arkets by buying short-term certificates of deposit (CDs), municipal notes, or U.S. Treasury bills,

whose value is based on an agreed-upon underlying financial asset (like a security) or set of

ties whose value is solely derived from the value of the primary security that they are linked to.
ading stocks directly, a derivatives market trades in futures and options contracts, and other
m underlying instruments like bonds, commodities, currencies, interest rates, market indexes,

ket in which participants can buy, sell, exchange, and speculate on currencies. As such, the
cash is the most liquid of assets. The currency market handles more than $5 trillion in daily
y markets combined. As with the OTC markets, the forex market is also decentralized and
from around the world. The forex market is made up of banks, commercial companies, central
nd retail forex brokers and investors. 
 ket in which participants can buy, sell, exchange, and speculate on currencies. As such, the
cash is the most liquid of assets. The currency market handles more than $5 trillion in daily
y markets combined. As with the OTC markets, the forex market is also decentralized and
from around the world. The forex market is made up of banks, commercial companies, central
nd retail forex brokers and investors. 
arket, and
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Objective questions: (one line answers)
3.1. Short-term and long-term loans may refer to the time period in which a loan is paid back. S
term loan repayments can last for a few years up to several years (such as 10-15) years.
3.2. . Debt investments, such as bonds and mortgages, specify fixed payments, including interest
"claim" on the earnings and/or assets of the corporation.
3.3. In financial markets T+2 is a shorthand for trade date plus two days indicating when securitie
securities transactions to be settled within a commonly understood 'settlement period'.
3.4. The difference between stocks and bonds is that stocks are shares in the ownership of a bus
some point in the future.This means that stocks are a riskier investment than bonds.

3.5. The main difference between the two is the yield. Treasury bills are a safer investment, and o
way to go. The money is secured and not locked away for as long as it would be in a t-bill.

3.6. Call Option gives the buyer the right, but not the obligation to buy the underlying security at
right, but not the obligation to sell the underlying security at the exercise price, at or within a spe
3.7. In the primary market, the investor can purchase shares directly from the company. In Secon
the primary market, security can be sold only once, whereas in the secondary market it can be d

3.8. In cash market, one can buy even one share of a company while in derivatives market minim
index but only stocks of individual companies while under derivatives market one can buy and se

3.9. Five sources of financing every small business needs to know

1. Friends and family. Contacting your closest connections is a crucial investment move for small
2. Government Funding
3. Bootstrapping
4. Credit Unions
5. Angel Investors and Venture Capitalists.
3.10.

3.11. Financial leverage is the use of debt to buy more assets. Leverage is employed to increase t
risk of failure, since it becomes more difficult to repay debt.

3.12. An angel investor (also known as a private investor, seed investor or angel funder) is a high
or entrepreneurs, typically in exchange for ownership equity in the company. Often, angel invest
3.13. The Weighted Average Cost of Capital (WACC) calculation as: 
WACC = Kd×(1-T)×D% + Ke×E%,
where Kd is the cost of debt before taxes,
T is the tax rate,
D% is the percentage of debt on total value,
Ke is the cost of equity and
E% is the percentage of equity on total value.
3.14. Debentures are issued by private/public companies for raising capital from the investors. B
WACC = Kd×(1-T)×D% + Ke×E%,
where Kd is the cost of debt before taxes,
T is the tax rate,
D% is the percentage of debt on total value,
Ke is the cost of equity and
E% is the percentage of equity on total value.

3.14. Debentures are issued by private/public companies for raising capital from the investors. B
of the physical assets or collateral. Debentures are issued and purchased only on the creditworth
3.15. The 5 Sub-Markets of Financial Market:
1. Capital Market
2. Commodity Market
3. Forex Market
4. Derivative Matrket
5. Money Market
3.16. An individual's net worth is simply the value that is left after subtracting liabilities from asse
loans, and car loans. ... In other words, whatever is left after selling all assets and paying off pers
3.17. The weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in w
including common stock, preferred stock, bonds, and any other long-term debt, are included in a
A firm’s WACC increases as the beta and rate of return on equity increase because an increase in
WACC Formula and Calculation
WACC= E/V*Re+D/V*Rd*(1-Tc) Re = Cost of equity
Rd = Cost of debt
E = Market value of the firm’s equity
D = Market value of the firm’s debt
V = E + D = Total market value of the firm’s financing
3.18. The three major pairs of Currencies are:
1. ESD/USD
2. USD/JPY 
3. GBP/USD 
3.19. . While trading online, demat account is used to hold shares and securities in dematerialise
from physical form to electronic form so as to increase their accessibility. You need a Demat Acco
3.20. An unlevered firm is a company with no debt, and is referred to as unlevered because it do
borrowing, usually from lenders, or from investors, by issuing debt through bonds or preferred st
ch a loan is paid back. Short term loans are generally to be repaid within a few months or a year or so. Long-
s 10-15) years.
ments, including interest, to the investor. Equity investments, such as stock, are securities that come with a

ndicating when securities transactions must be settled. The rules or customs in financial markets are for
ement period'.
 the ownership of a business, while bonds are a form of debt that the issuing entity promises to repay at
han bonds.

a safer investment, and often yield better returns. For a short term investment, commercial papers are the
ould be in a t-bill.

e underlying security at the exercise price, at or within a specified time. A Put Option gives the buyer the
price, at or within a specified time.
m the company. In Secondary Market, investors buy and sell the stocks and bonds among themselves. In
ndary market it can be done an infinite number of times.

erivatives market minimum lots such as 20, 50 or 100 are fixed. In cash market one cannot buy or sell the
rket one can buy and sell both index as well individual stocks of company.

estment move for small businesses.

employed to increase the return on equity. However, an excessive amount of financial leverage increases the

r angel funder) is a high net worth individual who provides financial backing for small startups
any. Often, angel investors are found among an entrepreneur's family and friends.

al from the investors. Bonds are backed by the asset of the issuer whereas debentures are not secured by an
 al from the investors. Bonds are backed by the asset of the issuer whereas debentures are not secured by an
only on the creditworthiness and reputation of the issuing party.

cting liabilities from assets. Examples of liabilities (debt) include mortgages, credit card balances, student
sets and paying off personal debt is the net worth.
rm's cost of capital in which each category of capital is proportionately weighted. All sources of capital,
m debt, are included in a WACC calculation.
e because an increase in WACC denotes a decrease in valuation and an increase in risk.

curities in dematerialised/electronic format. Under dematerialisation, your share certificates are converted
You need a Demat Account number to settle trades electronically.
unlevered because it doesn't have financial leverage. Financial leverage is created when a company utilizes
gh bonds or preferred stock.
hs or a year or so. Long-

ties that come with a

ial markets are for

romises to repay at

ercial papers are the

gives the buyer the

ong themselves. In

nnot buy or sell the

al leverage increases the

startups

s are not secured by any

 s are not secured by any

d balances, student

ources of capital,
.

tificates are converted

en a company utilizes
 Return on Amount(in
Particulars Weights Amount
Risks ₹lakhs)
High Risk 16% 3x 0.48x 78.46
Moderate Risk 12% 2x 0.24x 52.31
Zero Risk 6% x 0.06x 26.15
Total 34% 60 0.78x
Weighted Average
20.4
Return on Portfolio
 0.78x=(60*34)/100
78x= 2040
x= 26.15

2040

26.15385
 Amount(in Margin Money:
Particulars
₹ Lakhs)
Current Assets 400 Owner's funds and Share Application Money are added
group, Current and Non Current Liabilities as rest in
Current Liabilities 150 the liabilities side.The first basic lesson in credit which
is margin is nothing but “Current Assets – Current
Margin Money 250 Liabilities = Margin”.
lication Money are added as one
nt Liabilities as rest in
sic lesson in credit which
ent Assets – Current
 MAX Company
Amount(in
Particulars
₹Lakhs)
Debentures 80
Preferred Stock 40
Common Stock 80
Total 200

Marginal Tax Rate 40%

Required return on
equity 17%
Debt 13%

Preferred Stock 12%

Cost of Equity 120 20.4

WACC (Post Tax) 31.44 6.24
WACC (Pre Tax) 4.8
CASE STUDY

Investment Projected return(%) Investment Return expected

Wipro 0.18 1,500,000.00 270,000.00
TCS 0.16 1,000,000.00 160,000.00
2,500,000.00 -
SAIL 0.14 - -
TISCO 0.12 2,000,000.00 240,000.00
2,000,000.00 -
Government bonds 0.06 500,000.00 30,000.00
Total 5,000,000.00 -

GB+ W+TCS=2500000
0.30x+METAL= 2500000
1.30x 25000000
x 19230769.2307692
metal = 19230769
Government Bonds 5769230.76923077

OBJECTIVE FUNCTION
maximize the return
BOTH
minimize the risk
CONDITIONS
Financial Analyst : all new investments be made in IT industry, Metal or government bonds.
1 Neither industry (IT or metal) should receive more than Rs.25, 00,000
2 Government bonds should be at least 30% of the metal industry
3. The investment in Wipro, the high return but high risk investment cannot
be more than 60% of total IT industry investment.

Ascertain weighted average return of the Portfolio.

BILL: SHORT TERM

BOND: LONG TERM
treasury bill vs t. bond
t. bill is no risk but return of 6-7%
RETURN IS A FACTOR OF RISK with the exception of treasury