In investment
appraisal and review, several techniques and tools are used to guide the
investor correctly to enable him make the appropriate investment decision. This
is so because if a project is not appraised correctly, it is likely to run into
rough waters or even fail. The essential techniques are:
appraisal and review, several techniques and tools are used to guide the
investor correctly to enable him make the appropriate investment decision. This
is so because if a project is not appraised correctly, it is likely to run into
rough waters or even fail. The essential techniques are:
1.
Capital budgeting (under certainty)
Capital budgeting (under certainty)
2.
Capital budgeting (under uncertainty)
Capital budgeting (under uncertainty)
The gamut of these
will be enunciated as we go on. But for the elementary level of this course, it
is not expected that a deep exposition will unfold
will be enunciated as we go on. But for the elementary level of this course, it
is not expected that a deep exposition will unfold
For now we must
concern ourselves with the possible from an investor can get funds to finance
his business or project. The following are possible source
concern ourselves with the possible from an investor can get funds to finance
his business or project. The following are possible source
Short term finance
1.
Personal funds from saving and/or inheritance
Personal funds from saving and/or inheritance
2.
Loans provided by friends and relatives
Loans provided by friends and relatives
3.
Loans or credit from suppliers of raw materials, services or equipment
Loans or credit from suppliers of raw materials, services or equipment
4.
Government assistance through small scale industry credit e.g. NDE
Government assistance through small scale industry credit e.g. NDE
5.
Contributions from or by partners
Contributions from or by partners
6.
Osusu i.e. local communal credit system
Osusu i.e. local communal credit system
7.
Borrowing from cooperative societies
Borrowing from cooperative societies
8.
Bank borrowing
Bank borrowing
·
Bank overdraft
Bank overdraft
·
Bank loan
Bank loan
9.
Acceptance credits
Acceptance credits
·
Trade bill
Trade bill
·
Bank bill
Bank bill
Some of all the above
revenue for securing loan can neither be secured or unsecured i.e. Whether collateral securities are needed
revenue for securing loan can neither be secured or unsecured i.e. Whether collateral securities are needed
Medium Term Finance
Medium term source of
finance are known to be between the time frame of one to five years, depending
of course on the size of the organization and their corporate plan. In some
other organization medium term can be from one to eight years. So the term
medium term can be relative
finance are known to be between the time frame of one to five years, depending
of course on the size of the organization and their corporate plan. In some
other organization medium term can be from one to eight years. So the term
medium term can be relative
Source of medium term
finance as adduced by S.O Olaleye (2003) include:
finance as adduced by S.O Olaleye (2003) include:
1.
Term Loan: these are debts obligation having between 1 to 10years. Banks
are a major avenue for these loans and those that have maturities greater than
one year. The proceeds from term loans can be used to finance current assets,
such as inventory or accounts receivable and to finance the purchase of fixed
plant facilities and equipment, as well as to repay other debts.
Term Loan: these are debts obligation having between 1 to 10years. Banks
are a major avenue for these loans and those that have maturities greater than
one year. The proceeds from term loans can be used to finance current assets,
such as inventory or accounts receivable and to finance the purchase of fixed
plant facilities and equipment, as well as to repay other debts.
2.
Hire purchase: it is a credit sale agreement in which the owner of the
asset or supplier grants the purchasers the right to take possession of the
asset but the ownership will not pass until installment amounts are defrayed
over the period
Hire purchase: it is a credit sale agreement in which the owner of the
asset or supplier grants the purchasers the right to take possession of the
asset but the ownership will not pass until installment amounts are defrayed
over the period
3.
Lease agreement: it involves contract where the owner of the asset (the
lessor) and the user (lessee) allows the user an exclusive right to use the
asset in return for the payment on an agreed sum over a period of time. Types
of lease agreement include (a) finance lease (b) operating lease (c) leverage
lease
Lease agreement: it involves contract where the owner of the asset (the
lessor) and the user (lessee) allows the user an exclusive right to use the
asset in return for the payment on an agreed sum over a period of time. Types
of lease agreement include (a) finance lease (b) operating lease (c) leverage
lease
Long term finance
These types of loans
can run for several years. They are normally sought from the public by public
limited companies when they ask for subscriptions on share. They include:
can run for several years. They are normally sought from the public by public
limited companies when they ask for subscriptions on share. They include:
i.
Preferred stock
Preferred stock
ii.
Common stock
Common stock
Other forms of
financing
financing
Acceptance credits:
it is a form of short term financing used in financing trade. A bill of
exchange is one used between a seller and a buyer. It is a document drawn by
the seller on the buyer requiring him to pay the stated sum at a future date. A
bill of exchange takes two form. A trade bill and a bank bill
it is a form of short term financing used in financing trade. A bill of
exchange is one used between a seller and a buyer. It is a document drawn by
the seller on the buyer requiring him to pay the stated sum at a future date. A
bill of exchange takes two form. A trade bill and a bank bill
A trade bill: is a
bill of exchange in which the buyer acknowledges it by writing accepted across
and signing it. The seller may then hold the bill until the end of the stated
period. The buyer makes payment when the seller presents it
bill of exchange in which the buyer acknowledges it by writing accepted across
and signing it. The seller may then hold the bill until the end of the stated
period. The buyer makes payment when the seller presents it
A bank bill: this can
only be done when a bank accepts to recognize to make payments when it is drawn
on it. Here the bank undertakes to accept and make payment to the bill holder at
maturity. A bank will only accept bills drawn on it under the credit
arrangement if there is also a trade bill for goods, which the seller wishes to
draw on the buyer. The value of the bank bill might be equal to, but always
less than the value of the trade bill. Bills can be discounted at a profitable
rate and the proceeds paid to the seller
only be done when a bank accepts to recognize to make payments when it is drawn
on it. Here the bank undertakes to accept and make payment to the bill holder at
maturity. A bank will only accept bills drawn on it under the credit
arrangement if there is also a trade bill for goods, which the seller wishes to
draw on the buyer. The value of the bank bill might be equal to, but always
less than the value of the trade bill. Bills can be discounted at a profitable
rate and the proceeds paid to the seller
Factors that
influence investor choice
influence investor choice
The investors can avail himself the use of any
of the above sources of funds for investment. But the seeker of invest-able
funds to finance a business must look at certain criteria before making an
informed choice. Major (1993) offers the following as issues the investor must
look into:
of the above sources of funds for investment. But the seeker of invest-able
funds to finance a business must look at certain criteria before making an
informed choice. Major (1993) offers the following as issues the investor must
look into:
1.
Types of the sum (short, medium or long term)
Types of the sum (short, medium or long term)
2.
Size of the sum sought
Size of the sum sought
3.
Creditors or financiers willingness to lend
Creditors or financiers willingness to lend
4.
Investor’s cost of borrowing the funds (i.e. interest on the loan)
Investor’s cost of borrowing the funds (i.e. interest on the loan)
5.
Investor’s value of time preference for money at he given time
Investor’s value of time preference for money at he given time
6.
Opportunity cost of the investor’s fund
Opportunity cost of the investor’s fund
7.
Rate of investment assets liquidity
Rate of investment assets liquidity
8.
Market inter rates on deposits
Market inter rates on deposits
9.
Effects of other extraneous factors of risk and uncertainty such as
impact of inflation
Effects of other extraneous factors of risk and uncertainty such as
impact of inflation
10. Political economic stability of the economy or
nation
nation
