SOURCES OF

FINANCING FOR
THE COMPANY
EQUITY AND LIABILITIES AS
FINANCING OF ASSETS
 The company's sources of financing.
BENEFITS

PROMISSORY LEASING,
SUBSIDIES FACTORING
NOTES, BILLS BONUS OBLIGATIONS
RENTING
CAPITAL
INCREASES

DEBT ISSUES Other EQUITY

Business entity instruments ACCOUNTS
TECHNICAL
DEPRECIATIONS

crowdfunding

OWN
Sources of AJENAS
funding
LOAN

Sole proprietor CREDITICIA EXPONTANEAS

CREDIT

CONTRIBUTION OF
SUPPLIERS
PERSONAL DISCOUNT
ASSETS
TAXES
P.PARTICIPATIVE

SOCIAL SECURITY
 Types of financing
1. Depending on the degree of enforceability
a. Not enforceable
b. Enforceable
2. Depending on their origin
a. External sources
b. Internal sources
3. Depending on the type of negotiation required to obtain it
a. Spontaneous sources
b. Negotiated sources
4. Depending on their temporality.
a. Long-term enforceable
b. Short-term enforceable
SHORT-TERM FINANCING
 SHORT-TERM EXTERNAL FINANCING

Non-bank sources
a. Tax accounts,
b. Social Security contributions
c. Suppliers.
2. Banking sources
a. Current account overdraft.
b. Discounting of bills of exchange or bills of exchange.
c. Credit.
d. Short-term loans.
Factoring
 COST OF SHORT-TERM FINANCING.
SIMPLE INTEREST
• The interest rate is simple when the interest
earned at maturity is not added to the
principal in order to generate new interest.
• This interest rate is always calculated on our

initial capital.
• For this reason, the interest earned is not
reinvested in the following period, so the
interest earned in each period is the same.
 CONCEPT OF SIMPLE INTEREST

Cn= Co + Is = Co+ Co.t.r = Cox(1+t.r)

Cn = Final capital
Co = Initial capital
r = Interest rate
t = Time period
 C.- SUPPLIER FINANCING

• It arises as a result of the purchase of raw and auxiliary

materials on "credit".
• The deferral period depends on the economic sector to
which the company belongs, the commercial policy of
the suppliers or the solvency, importance and
knowledge of the customer.
• It is one of the most widely used forms of financing
– Its automatic nature
– Free of charge in most cases
– Its almost perfect adaptability to working capital
variations
 Supplier financing with cash discount

• Suppliers generally grant credit, even if the

company-customer does not ask for it.
• If the supplier gives the option of a discount in
the case of early payment, the credit can be very
expensive for the company as it will have an
implicit cost.
• It is usual to have a minimum number of days to
pay the cash discount. In this case the cost
formula will be:
 Cost of supplier financing for early
payment discounts

Cn Co X (1+t.r)
=

Clearing ic

Postponemen
Cost of financing t
or deferment
EXAMPLE

As the bank's financing cost is

12% and the supplier's is
9.407%, the supplier offers
better conditions. Therefore
we will accept to pay in 120
days.
 EXAMPLE
A selling company wishes to grant a 90-day deferment to its customers. It does
not have sufficient liquidity and to be able to do so it needs to go to the bank,
which finances it at 10% per annum. Calculate the maximum discount it could
offer.
The financing offered by the company to its customers may not be higher than the
financial cost offered by the Bank.
 2.- SHORT-TERM BANK FINANCING

A.-Discovered in current account

B.- Discounting of bills of

exchange: Bills and promissory
notes

C.- Short-term loans

D.- Short-term loans

 A.-DISCOVERED IN CURRENT ACCOUNT
• A situation where a current account, passbook or passbook has a negative
balance. You have spent more money than you had and owe that money
to the bank.

• It is often referred to as being in the red, because of the colour in which

negative balances are conventionally printed.

• The bank provides credit, even for a few days, to settle the overdraft. It is
usually quite expensive in relation to the amount and duration of the debt
with the bank. The fees are very high.

• It consists of a fixed part and a variable part that depends on the number
of days the account remains overdrawn.
A.-DISCOVERED IN CURRENT ACCOUNT
 B.- DISCOUNTING OF BILLS OF
EXCHANGE: BILLS OF EXCHANGE
• Bill discounting is one of the most typical
short-term corporate financing operations.
• Basically, a financial institution advances the
company the amount of a bill of exchange
receivable, with respect to maturity and after
deduction of interest and bank fees.
 BILL OF EXCHANGE
A bill of exchange is a document by which a natural or legal person (drawer)
orders another (drawee) to pay an amount in favour of a third party (holder or
taker), on a specific date (maturity).
 BILL OF EXCHANGE

If Company A does not want to wait for the 5 June maturity date, it can
DISCOUNT IT AT THE BANK.

The drawer: This is the person who is the creditor of the debt and who issues the bill of
exchange so that the debtor or drawee accepts it and pays the amount of the bill.
The drawee: The drawee is the debtor, who must pay the bill of exchange when the
indicated or maturity date arrives. The drawee may or may not accept the payment order
given by the drawer and if he accepts it, he is obliged to pay.
The drawee, bearer, holder or beneficiary: the person who holds the bill of exchange and to
whom it is payable.
 BILL DISCOUNTING IN SIMPLE DISCOUNTING

Cn
D

Co

D=Cn-Co

0 Discount days n
Early collection Expiry date
 FINANCIAL CALCULATION OF DISCOUNTING
The well-known simple interest formula is often used to calculate interest on
commercial discounting:
D=I+Cm = N * d/360 * T + Cm + Imptos

WHERE:
I = Amount discounted for interest.
Cm=amount discounted for commissions and expenses
N = Nominal of the effect.
T = Time expressed in days to maturity.
d = Nominal interest rate expressed in percentages of 1
Imptos = Stamp Duty, which is levied on the bill of exchange as a drawing
instrument. Depends on the nominal value of the bill of exchange.

THE CASH RECEIVED WILL BE: E = N - D

FINANCIAL CALCULATION OF
DISCOUNTING NOMINAL EFFECT 6.523,00 €
ANNUAL DISCOUNT RATE 8,50%
EXAMPLE
Settlement date 11/11/2020
•Calculate the amount that a company Expiry date 08/02/2021
will receive if it discounts a bill of days 89
exchange of €6,523.00 at the bank on 11 interests 137,07 €
November 2020, which matures on
08/02/2021. The discount interest rate commissions 19,57 €
offered by the bank is 8.5%. Commission AAJJDD 33,66 €
: 3‰ (minimum 5 euros).AAJDD = 33.66 TOTAL EXPENDITURE 190,30 €
€.
CASH TO BE RECEIVED 6.332,70 €
 FINANCIAL CALCULATION OF DISCOUNTING
EXAMPLE
Calculate the cash obtained in a simple commercial discounting operation in which
the nominal amount is €100,000, and a discount rate of 8% is applied half-yearly
for 3 quarters.

In this case the discount rate d is half-yearly and the time is given in quarters. We must
homogenise the time units of d and n.
In this case:

n=3 quarters

d=8%/2=4% quarterly
Co = Cn (1-dn) = 100,000(1-0.04-3) = 88,000 €.
PAYMENT

A private document by which an

individual agrees to pay another
individual a specified amount of
money by a certain date.
 ASSOCIATED DISCOUNT LINE
• We can clear a bill of exchange/receipt without a discount
line, however the discount line is used.
• This is a financial product whereby the bank advances the
amount of the paper to be negotiated (bills of exchange,
promissory notes or standardised bills) and charges interest
on it. The greater the guarantee of payment, the lower the
risk commission charged by the financial institution.
• Issued by the financial institution and signed before a notary
to become enforceable upon signature, specifying certain
conditions:
– Beneficiaries, persons who will benefit from the collection of these
documents.
– Line limit, maximum amount to be discounted by the bank.
– Guarantors: Those responsible in the event that a document is unpaid
and uncollected.
 CHECK

A document used as a means of payment by which a person (the drawer)

instructs a bank (the drawee) to pay a certain amount of money to another
person or company (the payee or holder). It can be either nominative or
bearer. A nominative cheque is to be cashed or deposited exclusively by the
payee explicitly named on the cheque. Nominative cheques can be given or
assigned to a third person by endorsement. If the cheque is marked "to
order", this means that it can be endorsed. On the other hand, it cannot be
endorsed if it has the stipulation "not to order".

Main modalities:
-Staffed, Formed, Banking
 DIFFERENCES BETWEEN CHEQUES, PROMISSORY
NOTES AND BILLS OF EXCHANGE
Check
It is payable on presentation,
irrespective of its issue date
The drawee is a credit institution
Longest submission deadline (15
days from the date of issue)
6-month limitation period
Can be revoked after the
deadline for submission (15
working days).
It can conform to
The practice of endorsements is
infrequent, due to their short life
span.
Promissory note Promissory note Bill of exchange
It is payable at the marked
There is no official model. It is a
maturity, unless it is issued at There is an official model
private document
sight
The drawer and drawee are
When the stamp is included in
confused in the signatory. The They are not always taxed for
the model, it is always taxed for
credit institution is simply the IAJD
IAJD.
domicile of payment.
The deadline for submission It is the creditor (drawer) who
The initiative belongs to the
coincides with the due date or puts the bill of exchange into
debtor
the following two working days. circulation.
3-year limitation period
Non-revocable
This procedure is not foreseen
It lends itself more readily to
being endorsed as it has a fixed
future maturity and allows the
endorsement to mobilise the
debt to meet other payments.
 C.-SHORT-TERM LOANS
• Short-term lending is a form of financing with a repayment term of less
than 18 months to cover short-term needs such as inventory purchases,
customer advances or other typical working capital needs of the company.
• On the day the loan is formalised, the company receives the total amount
to be repaid at the intervals agreed in the contract.
• The most common types of short-term loans are:

– Credit cards: the medium of the credit agreement is a card to which purchases
can be charged without having to ask for prior authorisation.
– Revolving cards are a type of credit card in which all purchases or cash
withdrawals are automatically deferred. In this way, the card user can pay for
these purchases in instalments.
– Mini loans or microcredits
 D.-SHORT-TERM CREDITS. CREDIT POLICIES
• Credit policies are similar to loans but there are differences
that make them very useful financing instruments for SMEs
and the self-employed.
• It is a loan that the bank grants and that we can resort to
whenever we need it. Taking out one of these policies does
not mean using the available capital if we do not consider it
necessary.
• Therefore, when we apply for these policies, we do not
receive the money we have been granted, but we are given
access to it for when we want to use it.
• We only pay interest on the money we actually use, not on
the total amount of credit we have been granted.
 3.- FACTORING
• It has two modalities:
– (1) the traditional one where the company
commissions the factor (another company) to collect
the receivables in return for a fee
– (2) the most commonly used: this involves selling to a
factor the receivables from customers, whereby the
company obtains immediate liquidity and the factor
assumes ownership of the receivables, collection
management and the entire risk
• Financial costs:
– The Commission
– Interest in advance financing
LONG-TERM FINANCING
 LONG-TERM EXTERNAL FINANCING
1.- THE ISSUANCE OF SHARES (Capital Increases).
2.- LOANS
• Single benefit and single consideration loans.
• Single benefit and multiple consideration loans.
• With one-off amortisation (American type).
• With constant amortisation.
• With constant instalments to be paid (French type).
3.-ISSUANCE OF BONDS
4.-LEASING
RENTING
6.-SHAREHOLDING ACCOUNTS
7.-PARTICIPATORY LOANS
 1.- THE ISSUE OF SHARES.
(Capital increases)
• Capital increase means any increase in the
share capital of a company. This may result
from the injection of new funds into the
company, or from the capitalisation of
reserves, in which case there is no actual
inflow of funds into the company.
 THE ISSUE OF SHARES.
(Capital increases)
CS=N.Vn +
Reserves Increase in M shares x
Assets P1(share price
Share capital:
(N+M) x Vn + Reserves
ACTIVO DE LA EMPRESA

ACTIVO DE LA EMPRESA
SHARE CAPITAL SHARE CAPITAL
+ RESERVES
PASIVO + RESERVES

PASIVO
ANTES DE LA AMPLIACION DESPUES DE LA AMPLIACION
 THE ISSUE OF SHARES.
(Capital increases)
• Any enlargement is defined by two elements:
– The ratio, or relationship, between the number of new shares
issued and the number of existing old shares.
– The issue price, i.e. the funds that the issuing company receives
for each share, will be determined by the company, with several
possibilities:
• At the same time
• Above par (with issue premium)
• Free (or free of charge)
• The issue price of a security multiplied by the total number
of shares determines the funds raised by the company in
the share issue.
• Moreover, as the number of shares increases without the
total value of the company increasing in the same
proportion, the value of the old shares decreases: dilution
 THE ISSUE OF SHARES.
(Capital increases)
M=number of new shares
P1=issue price
P1=Vn + share premium
MxP1
N+M= number of total shares
P= share price

BEFORE ENLARGEMENT ENLARGEMENT AFTER ENLARGEMENT

A share premium is the value of the new share that exceeds

the nominal value.

WHERE SPTHE
I THEORETICAL VALUE OF THE
SHARE AFTER THE CAPITAL INCREASE
 THEORETICAL VALUE OF THE SHARE AFTER
ENLARGEMENT

• The theoretical price of the P share shall be the weighted

average of the issued share price and the theoretical
value of the share before enlargement.
o 1

• The notional value P can also be calculated by

knowing only the ratio of new shares issued to existing
shares.
M/N being the ratio of new over existing
o 1 1
o

o 1
THE ISSUE OF SHARES.
(Capital increases)
 Value of the Subscription Right
• This is the right that allows the shareholder the possibility of subscribing for new
shares in proportion to the number of shares held when a capital increase is carried
out.

• When shareholders do not subscribe for new shares in proportion to the shares
they hold, the Economic Value of the Subscription Right arises.

• The Economic Value of the Subscription Right occurs when the issue price of the
newly issued shares P1 (Par Value + Premium) is lower than the theoretical value
of the shares before the increase P0.

• If P1<P0 there is dilution and then the Subscription Right will have a value given by:
D= Po-P

• Therefore, a person who wants to buy more shares than he/she is entitled to must
pay the necessary Subscription Rights to the shareholder who did not wish to
subscribe. In addition to the issue price P1 to the public limited company,
• If the ratio of new to old shares is M/N, the number of Rights will be N
for every M shares at a price of D
 Value of the Subscription Right
EXAMPLE
The company "Repite, S.A." has a share capital of 1,000,000
euros, which is divided into 100,000 shares of 10 euros each.
It has reserves of 300.000 €.
The percentage shareholding of the 3 partners is as follows:
Partner "A": 60%.
Partner "B": 20%.
Partner "C": 20%.
The General Meeting resolves to carry out a capital increase
of 110,000 euros, for which 10,000 new shares will be issued
at a value of 11 euros each.
Assume that B does not want to subscribe for new securities
and that C wants the securities to which they are entitled plus
those of Shareholder B. Partner A acquires the securities to
which it is entitled.
Calculate how much Partner "C" will pay out and to whom
 Value of the Subscription Right
EXAMPLE

NUMBER OF RIGHTS
PARTNER NO.
A 60.000
B 20.000
C 20.000
 BONUS SHARE ISSUE
A fully paid-up capital increase consists of the
use of the company's OWN FUNDS to increase
its share capital. In other words, no new
shareholder contributions are required.
This type of increase is based on the profits
generated by the company. For this purpose,
within the net assets, which will remain
constant, a transfer of money is made from the
reserves or profits obtained to the share
capital.
Example of a fully paid-up capital increase

Suppose a company has a share capital of

€100,000. The nominal value of the share is €1.
In addition, the company has accumulated
reserves of € 200,000 as a result of retained
earnings.
The firm announces that it will issue 100,000
new fully paid-up shares, i.e. the shareholder
does not pay any amount.
Determine the FFPP after enlargement, the
Example of a fully paid-up capital increase
SOLUTION
CS= 100,000
No. of shares:100,000. Par value €1
Reserves: €200,000
FFPP= 300.000€ . Po= 300000/100000= 3€/share.
Increase charged to reserves: 100,000 bn shares.
FFPP after: €300,000. No. of shares: 200,000 with a
nominal value of €1.
Theoretical value after: 300,000/200,000=€1.5
Subscription fee : D=Po-P=3-1,5=1,5€.
 2.- LONG-TERM LOANS

1. They are usually formalised by public deed

2. Their granting usually requires security, which may be
real (movable or immovable property) or personal.
3. They are usually subject to an arrangement fee and in
some cases an early cancellation fee.
4. In a financial sense, what the lender gives must be
equal to what the borrower pays back, all valued at
the same point in time and at the interest rate set for
the loan.
 2.1.-TYPES OF LOANS
• The following types of loans are distinguished
according to their form of repayment:
A. Single benefit and single consideration loans.
B. Single benefit and multiple consideration loans:
a) With one-off amortisation (American type).
b) With constant instalments to be paid (French type).
c) With constant amortisation.
 A.- LOANS FOR A LUMP SUM AND FOR A ONE-OFF
CONSIDERATION
– One-off loan. At the time the loan is formalised,
the lender delivers the initial capital minus the
possible arrangement fee and other formalisation
costs.
– One-off payment. At the end of the term of the
loan, the borrower repays the final capital sum,
which is obtained by adding the accrued interest
to the nominal amount.
– Unusual for long-term operations.

Co Cn=Co+I
 B.-SINGLE BENEFIT AND MULTIPLE
CONSIDERATION LOANS.

Co a1 a2 a3 a4 an

………………………………………
………..
 B.-SINGLE BENEFIT AND MULTIPLE
CONSIDERATION LOANS.
a) With one-time amortisation (American rate)
– The loan is repaid in a single instalment at the end of the
operation, so the first n-1 instalments of the loan are made
up of interest only.
b) With constant instalments to be paid
– The amortisation term (amortisation instalment plus
interest) is constant. It is also called annuity, monthly
instalment... depending on the period of time in which it
has been generated.
c) With constant amortisation
– The amount that the loan amortises is constant
 2.2.- INTEREST RATE ANALYSIS

• In banking practice, it is very common for loan instalments

or amortisation terms to be stated in months, quarters,
semesters, etc. In other words, in fractions of a year
• We will therefore need to know how to calculate the
interest rate that corresponds to a fraction of a year, as we
cannot calculate any amortisation table without first
converting the interest rate to its fractional equivalent.
• We will call m the fraction of the year:
– m=12 (monthly periods)
– m=4(quarterly periods)
– m=3(four-month periods)
– m=6(bimonthly periods)
– m=2 (six-month periods)
• We will call REDITO(m) =i(m) the resulting interest
rate in the m-th period.
• The annual interest rate charged by the bank,
irrespective of the annual instalments, is called the
ANNUAL CASH FEE (i).
• Its calculation is deduced as follows

• The ANNUAL NOMINAL AMOUNT j(m) is defined as

m times im
 EXAMPLE
• Let us look at an example of what the different yields and
nominal rates would be like for an effective annual
interest rate of 8%.

m i i(m) j(m)
12 mensual 8,00% 0,64% 7,72%
6 bimensual 8,00% 1,29% 7,75%
4 trimestral 8,00% 1,94% 7,77%
3 cuatrimestral 8,00% 2,60% 7,80%
2 semestral 8,00% 3,92% 7,85%
 2.3.- LOAN REPAYMENTS

• Every loan has an amortisation table which

sets out the evolution of the loan over its
duration.
Balance
Capital
Period Quota Interests Amortisation o
Amortised
Live
Capital
0
Co
1 a1 I1 A1 m1
C1
-- -- -- -- --
--
n an In An mn = Co 0
MODEL LOAN RECEIPT
 2.4.- LOANS WITH CONSTANT REPAYMENT TERMS -
FRENCH METHOD
This depreciation system is characterised by the fact that:
– Amortisation terms remain constant, and
– The interest rate remains constant.
• At the beginning, most of the instalment is interest, with a very small
amount for repayment. This proportion changes as time goes on.
• Graphically, the borrower's schedule of receiptsand payments
arising from the loan is as follows:

C0 represents the amount of the

loan, n the number of payments
over which the loan is amortised.
Ct represents the loan remaining
after the quota
CALCULATION OF THE AMORTIZATION TERM (a)
a1= a2=.....=at=a

It=Interest for period t

At= Amortisation of the loan in period t

1 1 t 1 t–1
 FRENCH SYSTEM LOAN COMPONENTS

𝟏− –(𝒏–𝒌)
Very useful when the interest rate is variable 𝑪𝒌 = 𝒂. 𝟏+𝒊
𝒊
 EXAMPLE

Number of periods = 4 years x 2 semesters = 8 periods

 𝒌–𝟏
𝒌 𝟏

1 1 o

5
6 6

n=8 and k=4

 Periodo Cuota Intereses Amortizacion Capital amortizado Capital Vivo
0 Co
1 a I1=i x Co A1=a-I1 m 1 =A 1 C1=Co-A1
2 a I2=i x C1 A2=a-I2 m2=m1+A2 C2=Co-A2
3 a I3=i x C2 A3=a-I3 m3=m1+A3 C3=Co-A3
… … … … … …

n a In=i x Cn-1 An=a-In Co Cn=0

Capital Capital
Periodo Término Intereses Amortizacion
amortizado Pendiente
0 24.000,00 €
1 3.564,67 € 960,00 € 2.604,67 € 2.604,67 € 21.395,33 €
2 3.564,67 € 855,81 € 2.708,85 € 5.313,52 € 18.686,48 €
3 3.564,67 € 747,46 € 2.817,21 € 8.130,73 € 15.869,27 €
4 3.564,67 € 634,77 € 2.929,90 € 11.060,63 € 12.939,37 €
5 3.564,67 € 517,57 € 3.047,09 € 14.107,72 € 9.892,28 €
6 3.564,67 € 395,69 € 3.168,98 € 17.276,70 € 6.723,30 €
7 3.564,67 € 268,93 € 3.295,74 € 20.572,43 € 3.427,57 €
8 3.564,67 € 137,10 € 3.427,57 € 24.000,00 € - 0,00 €
 EXAMPLE WITH VARIABLE INTEREST RATES

Develop the amortisation table for a 6-year

loan of 200.000,00 euros using the French
system in which the effective interest rate
for the first 3 years is 4%, the effective
interest rate for the following two years is
5% and the effective interest rate for the
last year is 3%.
 FRENCH METHOD
EXAMPLE WITH VARIABLE INTEREST RATES
Capital 200.000,00 €
=38.152,38
Periods 6

Interest 1st-3rd 4% 𝟏 − 𝟏 + 𝟒% –𝟑
𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝒗𝒊𝒗𝒐 𝒂𝒍 𝒇𝒊𝒏𝒂𝒍 𝒅𝒆𝒍 𝟑º 𝒂ñ𝒐 ⇒ 𝑪𝟑 = 𝟑𝟖. 𝟏𝟓𝟐, 𝟑𝟖. = 𝟏𝟎𝟓. 𝟖𝟕𝟔, 𝟑𝟑€
𝟒%
Interest 4th-5th 5%

Interest 6th 3%
=38.878,69

French system 𝟏 − 𝟏 + 𝟓% –𝟏
𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝒗𝒊𝒗𝒐 𝒂𝒍 𝒇𝒊𝒏𝒂𝒍 𝒅𝒆𝒍 𝟓º 𝒂ñ𝒐 ⇒ 𝑪𝟓 = 𝟑𝟖. 𝟖𝟕𝟖, 𝟔𝟗. ( ) = 𝟑𝟕. 𝟎𝟐𝟕, 𝟑𝟑€
𝟓%
=38.138,15

Tipo Capital
Periodo Cuota Interés Intereses Amortizacion Capital Vivo
vigente Amortizado
0 200.000,00 €
1 38.152,38 € 4% 8.000,00 € 30.152,38 € 30.152,38 € 169.847,62 €
2 38.152,38 € 4% 6.793,90 € 31.358,48 € 61.510,86 € 138.489,14 €
3 38.152,38 € 4% 5.539,57 € 32.612,81 € 94.123,67 € 105.876,33 €
4 38.878,69 € 5% 5.293,82 € 33.584,88 € 127.708,55 € 72.291,45 €
5 38.878,69 € 5% 3.614,57 € 35.264,12 € 162.972,67 € 37.027,33 €
6 38.138,15 € 3% 1.110,82 € 37.027,33 € 200.000,00 € - 0,00 €
 2.5.- CONSTANT AMORTISATION LOANS

• This method consists of repaying the same

amount of principal each term of the loan.
• Therefore, the interest over each period will
change, and therefore the amortisation term to
be paid in each one of them.
• Analytically:

• The amortisation terms will thus be as follows

 EXAMPLE
A bank offers a company a loan of 10,000 euros at a rate of 8% per annum, to
be amortised annually over 10 years by means of constant repayments.
Calculate the amortisation table

SOLUTION
First, we will find the repayment instalment: A=10,000/10=1,000 euros.
The first year we have to pay interest on all the capital we have drawn down, 10,000 euros, and
we have to pay the principal repayment, i.e. 1,000 euros per year.
a1=A+C0. i = 1.000 + 10.000 * 0,08 = 1.800 euros
Capital Capital
Periodo Término Intereses Amortizacion
amortizado Pendiente
0 10.000,00 €
1 1.800,00 € 800,00 € 1.000,00 € 1.000,00 € 9.000,00 €
2 1.720,00 € 720,00 € 1.000,00 € 2.000,00 € 8.000,00 €
3 1.640,00 € 640,00 € 1.000,00 € 3.000,00 € 7.000,00 €
4 1.560,00 € 560,00 € 1.000,00 € 4.000,00 € 6.000,00 €
5 1.480,00 € 480,00 € 1.000,00 € 5.000,00 € 5.000,00 €
6 1.400,00 € 400,00 € 1.000,00 € 6.000,00 € 4.000,00 €
7 1.320,00 € 320,00 € 1.000,00 € 7.000,00 € 3.000,00 €
8 1.240,00 € 240,00 € 1.000,00 € 8.000,00 € 2.000,00 €
9 1.160,00 € 160,00 € 1.000,00 € 9.000,00 € 1.000,00 €
10 1.080,00 € 80,00 € 1.000,00 € 10.000,00 € - €
 2.6.- LOANS WITH SINGLE REPAYMENTS
(AMERICAN TYPE)
• This type of loan is characterised by:
a) Only one principal repayment is made at the
maturity of the loan, for the full amount of the
loan.
b) In the other periodic instalments, only the
interest for the period is paid.
• Interest for each period is calculated:
Is =Cs-1 x i x t
Cs-1 being the amount outstanding at the end of the
previous period
 EXAMPLE

A bank grants a loan of €3,000,000 under the simple American method, with
an interest rate of 5% and a term of 5 years:
Calculate:
a) Amount of interest in each period and of the periodic instalment.
(b) Outstanding amount and principal amortised over the life of the loan.

Capital Capital
Periodo Término Intereses Amortizacion
amortizado Pendiente
0 3.000.000,00 €
1 150.000,00 € 150.000,00 € - € 3.000.000,00 €
2 150.000,00 € 150.000,00 € - € - € 3.000.000,00 €
3 150.000,00 € 150.000,00 € - € - € 3.000.000,00 €
4 150.000,00 € 150.000,00 € - € - € 3.000.000,00 €
5 3.150.000,00 € 150.000,00 € 3.000.000,00 € 3.000.000,00 € - €
 2.7.- ANNUAL PERCENTAGE RATE OF
CHARGE E.A.R.T.
• An arrangement fee Cm and a brokerage fee Cc
are common.
• It is also common for institutions to charge
interest on a monthly basis.
• Therefore we need to know what is the real
interest rate or COST that the financial institution
is actually charging us.
• The E.A.R. is an indicator that, in the form of a
percentage per annum, reveals the effective cost
of a financial product, as it includes interest and
bank charges and fees.
1. When the loan payments are in years and there
are arrangement fees and origination fees.

Where APR is the effective cost of

the loan, which can be cleared
through trial-and-error or by
ordering
 EXAMPLE
Calculate the APR of a loan of €12,000, at 9% effective annual
interest, to be repaid in 4 years. The bank commission is 3
per thousand.

SOLUTION:
First, we will calculate the cash we receive:
12.000- 3/1000x12000= 11.964,00€
Secondly, we will calculate the annual instalment resulting from a loan of 12,000
(because this is the amount of money to be repaid) at 9% per annum and for 4
years. –4
3,234=3.704,02 €
Third: We will obtain the APR.

APR= 9.14%.
2. When loan payments are in months and
there are arrangement fees and origination
fees.
 EXAMPLE
Calculate the APR of a loan of €12,000, at 9% nominal annual
interest, to be repaid in 48 months. The bank commission is
3 per thousand.
Solution:
The cash we receive will be 12.000- 3/1000x12000= 11.964,00€.
The monthly interest rate will be: r(12)=9%/12=0.75%.
The resulting monthly fee will be:
298,62 €
TAE(12)= 0.76% =>

=9,55%
 3.-ISSUANCE OF BONDS AND
DEBENTURES
• The issuance of bonds or debentures is a very
common form of long-term financing for large
companies.
- A debenture is a security that represents a portion
of a loan granted to the company and is called a
bond.
- The holder of an obligation, called a
debenture holder, is a creditor of the
company.
 4.- LEASING

COMPANY 1 Sale and purchase agreement for the asset

Customer SUPPLIER
(Tenant) 5 Supply of the good
6 Lessor's agreement

3 Authorisation and
formalisation of the lease 4 Ordering of the good
BANK
 5.- RENTING
• Allows its user the use of an asset on a long-
term rental basis.
• It differs from leasing in that it is a rental.
• The company's indebtedness is not increased
because it is not a long-term debt and
liabilities are not increased.
• It is deductible for tax purposes
• There is an uncertainty-free forecast of costs
01 02 03 04
EQUITY PARTICIPATING CROWDLENDING CROWDFUNDING
ACCOUNTS LOANS

CROWDFUNDING
 • A formula for investing in businesses
and limiting liability to the contribution
made is the joint venture account
contract.
• It is a collaboration contract whereby
one of the contracting parties
(account-participant) contributes
6.-SHARE money to the manager, who will
devote it to certain business activities,
ACCOUNTS which he will carry out in his own
name, without any intervention by the
contributor except in the receipt,
where appropriate, of the profits
obtained.
• It can be an ideal formula for
entrepreneurs and business angels.
 1 2
It is a long-term loan, even
with a grace period, whose
interest is linked to the
results obtained with the
business project.
7.- PARTICIPATING LOANS
3
They usually have a fixed In the event that the project
part and a variable is wrecked, the equity loans
interest part, which will are treated as equity. It
be fixed depending on functions as subordinated
the expected economic debt, i.e. the lender is placed
performance of the after the common creditors
in a bankruptcy process and
activity in which it is will only collect ahead of the
invested. company's shareholders.
 8.- FINTECH
• A fintech is any application or software that enables a financial transaction to
be carried out through technology.
• They have emerged in recent years to respond to the financing needs of
companies from a different perspective to the traditional one; without
personal guarantees and very quickly.
• The emergence of new online platforms, allowing direct loans to be granted
between businesses and consumers without the need for bank intermediation
or the proliferation of new payment systems.
• Some clear examples: mobile applications, wallets, contactless cards, Paypal,
etc.
• Fintechs can be divided into five broad groups:
– means of payment,
– bank financing,
– agency, payment deferrals and
– foreign exchange
It consists of financing to companies, projects or individuals by numerous investors

It is an innovative model that allows financing by the financial community without using the
services of a bank or other traditional financial institution.

Peer-to-business lending or p2b lending, or simply crowdlending.

Companies usually have to demonstrate their credit quality as well as their level of
delinquency to be classified and rated in order to provide information on their risk to lenders.
Interest rates will depend on the company's rating as well as the demand for loans from
investors.

9.- CROWDLENDING
It is a crowdfunding network, usually online, that through financial or
other types of donations, manages to finance a certain project in
exchange for rewards, altruistic participation.

It is an innovative model that allows financing by the financial

community and in which investors are offered the possibility to
participate as a shareholder.

The projects for which it is used can be very varied: from musical or
artistic projects (raising money for a film or a short film) to political
campaigns, debt financing, the creation of schools or the birth of
companies, among others.

10.- CROWDFUNDING
INTERNAL FINANCING
 INTERNAL FINANCING
• Self-financing is made upof those financial
resources that the company generates itself.
• Two classes:
– Self-financing by enrichment or self-financing by
expansion:
These would be reserves or retained earnings
– Self-financing by maintenance or replenishment self-
financing:
These would mainly be depreciation, but would also
include provisions and accruals.
 INTERNAL FINANCING

RETAINED SINKING FUNDS

EARNINGS

Self-financing
Reservations
for Self-financing
enrichment of
maintenanc
e
Technological
Physics
Alteration in demand
Obsolescence Depreciation

Alteration of Exhaustion
remuneratio
n Productive
 INTERNAL FINANCING:
RESERVES
• From a very general point of view, we can say
that reserves are profits that the company has
not distributed and has kept for the
uncertainty of the future.
• Reserves form part of a company's own funds
and are intended to be able to meet
obligations to third parties that may arise
immediately.
• There are different types of reservations.
 INTERNAL FINANCING:
RESERVES
– Profit accrual reserves:
• Legal reserve: The law obliges to allocate 10% of the profit
obtained until reaching 20% of the share capital.
• Statutory reserve: when the company's articles of
association require it to be set up.
• Special reserves: the law may require the establishment of
reserves for a specific reason.
• Voluntary reserves: The company itself decides voluntarily to
establish this reserve.
– Reserves arising from capital operations
• For capital increases. Share premium: Excess over the
nominal value at which new shares are issued to compensate
for the higher value of existing old shares and to capitalise
the company.
 INTERNAL FINANCING:
AMORTISATION
TRIPLE MISSION
1. Economic mission by periodically updating the value
of assets for the loss they suffer with use and the
passage of time.
2. Accounting mission in the accrual/deferral or timing
of expenses for the purchase of fixed assets.
3. Financial mission by retaining a portion of the
annual profits in the company in order to be in a
position to replace the asset at the end of its useful
life.
The Expansive effect of depreciation or
LOHMANN- RUCHTI effect
EXAMPLE
 EXAMPLE
Accumulated
no. of annual accumulated Purchase of tractor
Years residual
tractors amortisation depreciation tractors casualties
depreciation
1 10 28800 28800 2 0
2 12 34560 34560 2 5760
3 14 40320 46080 3 2880
4 17 48960 51840 3 8640
5 20 57600 66240 4 8640 10
6 14 40320 48960 3 5760 2
7 15 43200 48960 3 5760 2
8 16 46080 51840 3 8640 3
9 16 46080 54720 3 11520 3
10 16 46080 57600 4 0 4
11 16 46080 46080 3 2880 3
12 16 46080 48960 3 5760 3
13 16 46080 51840 3 8640 3
14 16 46080 54720 3 11520 3
15 16 46080 57600 4 0 4
16 16 46080 46080 3 2880 3
17 16 46080 48960 3 5760 3
18 16 46080 51840 3 8640 3
19 16 46080 54720 3 11520 3
 THE COST OF EQUITY AND DEBT CAPITAL

• The Weighted Average Cost of Capital will be

composed of:
– Cost of external financial resources
– Cost of own financial resources
• This is the cost of each of the financial
sources used by the company.
a) Allows the selection of the source or combination of
financial sources to be used to finance an
investment.
b) The cost of capital is used to value investments for
the calculation of NPV.
 COST OF EXTERNAL RESOURCES
1. Withdifferentdebtsthere will also be different
costs.
2. When interest is paid on a debt, the cost of
that debt will be the APR.
3. The average cost of borrowed fundsshall be the
weighted average cost

Where:
Di= Amount of the i-th Debt
Ki=Cost of the i-th debt
 COST OF EXTERNAL RESOURCES
EXAMPLE
DETERMINE THEAVERAGE COST OF BORROWED FUNDS FROM
THE FOLLOWING INFORMATION FROM COMPANY XYZ :
1) The company has a loan for €10,000,000 with an APR of
7.89%. It was requested for a period of 10 years with
American amortisation at an effective annual rate of 7%.
Arrangement fee of 1% and expenses of €500,000.
2) He also has an 8-year loan from a financial institution for an
amount of €3,000,000. This loan is repaid in constant
annuities at an interest rate of 8% and the financial entity
charged him an initial commission of 1.75%, giving an APR of
8.47%.
3) The company also has debts to suppliers of € 500,000.00 free
of charge.
 COST OF BOND ISSUE
COST OF THE LOAN OF 10.000.000,00€.
 COST OF LOAN ISSUE

COST OF THE LOAN OF 3.000.000,00€.

 AVERAGE COST OF DEBT

7 6 5
D

Loan 1 Loan 2 Suppliers TOTAL

AMOUNT 10.000.000,00 € 3.000.000,00 € 500.000,00 € 13.500.000,00 €

COST 7,89% 8,47% 0% 7,73%
 COST OF OWN FINANCIAL RESOURCES

• It can be defined as the return expected by

shareholders through the expectation of future
profits (dividend payout).
• If the shareholder were to maintain his
investment for life, the cost of funds for the
company in the constant dividend case could be
calculated as:

P0 = d.a  k = d  k a =
a ka 0 P
d
 COST OF OWN RESOURCES
EXAMPLE
The market value of XYZ's equity is €25,000,000. The
dividends distributed in the last year coincide with the
profit for the period amounting to €2,700,000,

𝒂
𝒐
 WEIGHTED AVERAGE COST OF CAPITAL
• It shall be calculated as the weighted average of the cost of the
different sources of funding that have been made available.
• If defined:
– kd: Cost of borrowed funds or cost of debt (APR).
–Ka: Cost of equity.
– T: Tax rate to which the company's profits are subject.
– D: External funds.
– FP: company's own funds.
THE WEIGHTED AVERAGE COST OF CAPITAL (K), SHALL BE:
D FP
k = k d (1  + ka
T) FP + D FP + D
 WEIGHTED AVERAGE COST OF CAPITAL
EXAMPLE
Calculate the Weighted Average Cost of Capital
with the data from the previous year knowing
that the tax rate is 25%. D FP
k = k d (1  T + ka
) FP + D FP + D

DEUDA FFPP TOTAL

IMPORTE 13.500.000,00 € 25.000.000,00 € 38.500.000,00 €
Porcentaje sobre Total 35,06% 64,94%
Tipo impositivo 25%
coste bruto Deuda 7,73%
COSTE DEUDA 5,80%
COSTE RRPP 10,80% 9,05%